This article first appeared in Personal Wealth, The Edge Malaysia Weekly on December 23, 2019 - December 29, 2019

Geopolitical tensions, combined with overly optimistic valuations of several high-profile listings, have constrained activity in the global initial public offering (IPO) market this year, according to multinational law firm Baker McKenzie’s latest report.

The report on the Cross-Border IPO Index 2019 highlights that global IPO activity fell 20% to 1,242 listings while the value of capital raised declined 8% to US$206 billion. Also, more than 80 companies pulled back plans to go public this year.

While 2018 was a blockbuster year for cross-border IPOs, 2019 has been less ebullient, resulting in the Cross-Border IPO Index falling 35% to 19.5. Despite the drop, the index remains at its second-highest level since 2014 as its performance is still elevated when compared with previous years.

The report notes that both investors and issuers are on the sidelines in the face of global geopolitical tensions such as the ongoing US-China trade tensions, extension of the Brexit deadline, unrest in Hong Kong and civil and political unrest throughout Latin America. “Further enhancing depreciating market conditions, several high-profile, pre-profit unicorn IPOs performed poorly this year, disappointing investors and adding weight to the question of whether private valuations are a realistic indication of a successful IPO performance.

“In this context, investors are becoming more cautious of similar types of listings coming to the market, leading to increased levels of scrutiny of company financials and paths to profitability. This change in investor sentiment has led to a number of postponements and cancellations among anticipated offerings — the most notable being the cancellation of the WeWork IPO.”

Despite the unrest, Hong Kong remains the leading cross-border IPO destination, with 102 IPOs or down just 4% from last year. The report attributes the resilience to issuers remaining confident in the city’s infrastructure and investor base.

“Such is the case of Alibaba’s US$11.2 billion Hong Kong listing. Despite a postponement earlier in the year to assess market conditions, it has performed strongly and has since exercised an overallotment of shares, raising a rumoured US$1.7 billion,” says the report.

Brexit and weak economic activity across the eurozone have resulted in a slow IPO market in the Europe, Middle East and Africa (EMEA) region. Volume has dropped 46% to 113 IPOs while value remained steady at US$45.6 billion, the report adds.

Despite the low volume of listings, the value of the IPOs in the EMEA region has managed to remain static due to 10 mega-IPOs in the region. The report also highlights that Saudi Aramco’s IPO was expected to be the largest in history and without it, the region would see its poorest performance since 2012.

“In the US, 2018 saw an unprecedented number of cross-border IPOs from Chinese tech issuers, somewhat slanting the 13% decline shown in 2019 offerings. However, hand in hand with this decline comes the increase in domestic Chinese listings, suggesting that we could be seeing the impact of the long-running US-China trade war,” says the report.

In 2019, China has led the way with 260 IPOs, 179 of which have been domestic. Chinese domestic listings have increased 77% this year, raising US$31.8 billion, or a 58% increase in value.

Activity in the global IPO market is forecast to remain subdued in 2020, with the threat of a downturn further enhanced by the upcoming US presidential election, which tends to increase volatility in the global market.

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