IPO adviser urges caution on Alibaba

Investors are turning cautious about paying premium prices for the initial public offering (IPO) of Chinese tech giant Alibaba in New York.

The Chinese tech giant – often described as eBay, PayPal and Amazon in one – could become the largest IPO of a private company to date.

It will eventually find its way into almost every major benchmark index and institutional equity portfolio.

Kathleen Smith, principal at the IPO investment advisory firm Renaissance Capital, says Alibaba will also be a candidate for early inclusion in the Renaissance IPO ETF, making it one of the first of many exchange-traded funds to own Alibaba once it starts trading.

Smith says interest in the Alibaba IPO is elevated because it is unusual for such a sizable company to grow so rapidly and be so profitable.

“Despite the strong interest in Alibaba, US investors are going to be cautious about paying premium prices for this IPO,” she says.

“The IPO market has turned negative on the tech sector and for good reason.”

Data from Renaissance Capital shows that the 24 tech IPOs that raised $3.6 billion (€2.6 billion) have produced a loss of 16.5% post-IPO. This was worse than any other sector.

Over half of these tech IPOs are currently trading below their IPO prices.  The four Chinese IPOs that listed in the US market this year – microblogging service Weibo, real estate web site Leju Holdings, private medical center operator iKang Healthcare and IT learning center chain Tarena – are down 7.9% in post-IPO trading.

“The US IPO market has gone through a reset of valuations over the past month,” Smith says, adding that the last 13 IPOs priced since April 10 have all priced below the mid-point of their proposed price ranges, and ten of these 13 were priced below the proposed range.

Smith says this was a “significant disappointment” to the companies and their underwriters.

“Investors have become more price sensitive because returns on recent IPOs have underperformed the market,” she adds.

The Renaissance IPO ETF, a basket of companies that have recently gone public, outperformed the S&P500 until March this year.

However, that outperformance has reversed and the ETF is now down 2.9% for the year. This compares to a return of 1.9% return for the S&P500. 

Despite its size, it took some time for international investors to get interested in Alibaba.

Awareness of Chinese brands is generally low; consultancy Brandz says in a recent report, entitled Top 100 most valuable Chinese brands 2014, that only 6% of the people in the US can name any one Chinese brand of any sector.

Alibaba was initially known mainly because Yahoo has been an early investor, but more recently it received publicity over its decision to list in New York instead of Hong Kong.

©2014 funds europe



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