International IPOs: Time to act on global ambitions

Cuong Dinh Tran is a leading financial professional and a key leader navigating Ernst & Young Viet Nam throughout its 30 years of development.

As one of the leaders in supporting and consulting fundraising deals and initial public offerings (IPOs) in international markets, how does EY teams evaluate the global IPO picture in 2021?

According to the recently published 2021 EY Global IPO Trends report, the global IPO market was the most active in the past 20 years with 2.388 deals raising US$453.3 billion. Year-over-year, global IPO activity was up 64% and 67% by the number of deals and proceeds.

In my opinion, initial optimism regarding COVID-19 vaccine rollout, the global economic rebound from the sharp declines of 2020 and ample liquidity in the financial system from government stimulus programs were the key drivers of exceptional IPO activity in 2021.

Notably, technology-enabled, user-friendly trading platforms attracted new retail investors to IPO activities and COVID-19 has been a catalyst for the rapid evolution of these platforms.

At the same time, strong market performance supported 2021 IPO activities in the US and some European countries, which will provide a strong push for businesses and a conducive environment for IPO in terms of valuation and time in the near future.

An important highlight is the Americas, which reached an all-time high, both volume and procceeds in 2021, with the US contributing nearly 80% of IPO deals. There were 416 deals with a total valuation of US$155.7 billion in the US, increases of 86% and 81%, respectively, according to the Report. The US also remained the top cross-border IPO destination with 106 companies choosing to list there.

This strong attraction of the US market is also shown by over 75% of issuers achieving or exceeding their target price ranges in 2021.

Leading Vietnamese businesses seem to be paying little attention to IPO at this point. Why do you think this is so?

I am not entirely sure they are not interested, given that there is always significant capital demand to support business growth. Through international IPO, businesses can access abundant capital at a reasonable cost to secure their long-term development. In addition, an international IPO can also be an effective tool for brand building and promotion across borders. For instance, a US listing is a great opportunity to showcase a company’s brand strength to global partners as well as the domestic market and investor community. The benefits of International IPO are clear for all businesses conducting international financial transactions – and as such, it has been an emerging trend among Vietnamese companies for years now. In fact, the very first international IPOs by top Vietnamese companies took place more than 10 years ago. However, there has yet to be a case of spectacular success to reference. To my knowledge, all businesses either canceled their listings or suspend their listing plans.

Is this due to an internal feature of the businesses or some other factors?

There are a number of reasons why Vietnamese businesses have not succeeded in their international IPO attempts. To start with, international listing regulations and practices are much more rigorous than those in Vietnam.

An IPO is very much about the future vision and prospects a business offers to investors. They must make their story compelling, with a detailed strategic vision, well-conceived business strategy, as well as a feasible action plan to attract investors. 

However, not many Vietnamese businesses have been paying attention to such matters while implementing IPO plans and compiling relevant management documents.

Notably, if local businesses want to list in the US, they need to think long and hard about the “future story” they want to tell investors in one of the most developed economies in the world. The majority of Vietnamese businesses operate in agriculture, producing and trading rice, coffee, or seafood, or the light industry such as textiles, leather and footwear at a very modest scale and capital.

Although a significant number of companies operating in banking, aviation, real estate, and consumer goods have posted tremendous achievements during the past few years, very few of their brands are recognized beyond the Vietnamese border.

In addition to outlining a compelling future vision, businesses must convince investors of their execution and monitoring capacity to support the proposed plans. Thus, building a strong talent pool, an effective and transparent management structure, from the Board of Directors, the highest level, to the Board of Management and all departments are key to success.

At the same time, businesses must strictly comply with stringent regulations regarding corporate governance, reporting, information disclosure, and shareholder relations, pursuant to the requirements of international stock exchanges.

Issuers must convert their financial statements to international accounting standards such as the International Financial Reporting Standards (IFRS) or the Generally Accepted Accounting Principles (GAAP) of their listing destination.

Human resources must not only accumulate in-depth knowledge in international listing and sufficient English language skills but also gain experience through similar successful projects. However, there is a shortage of Vietnamese human resources who can meet these requirements and perform these tasks proficiently and confidently.

It is equally important to be able to deal with the time pressure for deal readiness and execution while coming up with a viable structure to ensure efficient transactions.

Facing all these barriers, hence, after weighing the costs and benefits of international listing, a number of businesses had to choose to either cancel or suspend these plans.

While at a lower economic development level, Vietnamese businesses cannot be counted out of the “global game”. As one of the most trusted advisors in international IPO activities, have EY teams been supporting any local companies with IPO ambitions?

Recently, we have been advising several businesses who want to list in the US. There are several reasons why I believe this is the right time for domestic companies to list internationally.

First off, a handful of leading businesses, after accumulating capital and experience in the domestic market, are considering setting foot overseas. These enterprises operate in non-traditional and innovative fields like technology, e-commerce and high-tech manufacturing. An international listing can help these companies reach new customers beyond their usual business territory.

Another positive is that many domestic businesses have been taking advantage of the digital economy. They have been developing digital applications and technology ecosystems, thanks to their agility to capitalize on the disruptions.

These emerging “unicorns” are rearing to conquer regional and world markets – and an international IPO is emerging as a fitting solution for them.

According to a recent report on the digital economy published by Google, Temasek and Bain & Company, Vietnam's digital economy will likely reach US$57 billion by 2025 and then US$220 billion by 2030, ranking second in the region, only after Indonesia.

Moreover, the technical and corporate governance knowledge of local talent has improved significantly as they have mastered international standards and best practices. Vietnamese issuers looking for an international listing can also combine internal and external talent. Therefore, the time is right for domestic enterprises to be more confident and list on the international market.

Moreover, the flourishing global stock market in 2021 has been motivating businesses in Vietnam and around the world to mobilize capital through IPOs.

As we look ahead to 2022, there are risks of inflation and new waves of COVID-19 across geographies that could hamper economic recovery. However, relatively high valuations and market liquidity are keeping the IPO window open this year.

It seems the COVID-19 pandemic is here to stay. What is hindering the IPO plans of Vietnamese businesses under these circumstances?

Let us approach it from a different angle. The COVID-19 pandemic is accelerating people’s use of technology. According to the World Bank, the use of digital platforms, e-commerce sites, social networks and specialized applications has increased sharply in Vietnam in response to the COVID-19 pandemic, from 48% in June 2020 to 73% in January 2021. During the same period, the rate of enterprises investing in digital solutions – such as installing equipment and software for business operations –- quadrupled from 5% to 21%.

As the economy becomes more digitized, cross-border business activities will grow more energetic. This is an opportunity, but also a challenge, for technology businesses to transform by staging international IPOs.

Apart from technology, COVID-19 has also been drastically changing attitudes in health care. This could lead to the birth of new “unicorns” in this industry, supported by digital platforms and other innovative treatment and management solutions, who will then be able to leverage international listings. Health care is already attracting foreign investors as it contributed the second-largest number of deals and proceeds in 2021, just behind the technology sector. Local businesses that have built a strong reputation and are now looking to bring their products and services to global consumers should also consider the same opportunity.

ASPIRATION IS KEY

What do you think businesses absolutely cannot go without when to conduct a successful IPO in global markets?

The narrative businesses employ to convey their future vision and strategy to foreign investors is key to the success of an IPO in the international markets. Obviously, apart from telling an engaging story, issuers must strictly comply with listing regulations and global standards.

Business leaders must have the aspiration to conquer the global market, along with the ability and commitment to realize it. This is the most important factor for IPO success in a foreign market.

What steps do businesses need to follow when preparing for an IPO in the international capital market?

The workload is enormous, before, during, and even after an IPO. In addition to preparation work such as deal structuring and administrative work, there are a few outstanding practical points businesses should consider to assess their readiness.

Accounting and reporting

Businesses need to understand and be able to comply with financial reporting requirements under IFRS or US GAAP, such as the required number of years for comparison, reporting continuity, and the quality of audited financial statements. In some cases, additional audits of assets or subsidiaries may also be necessary.

Financial management

Businesses need to have a realistic assessment of their financial management such as their analysis and ledger closing ability. Financial management directly affects preparation time and the quality of financial information to meet stakeholders’ expectations.

Tax structure

This is a relatively complicated part requiring careful evaluation of businesses’ current tax structure. Also, the issuers must have a clear conversion plan and be ready to implement a new structure for both listed companies and the entire transaction if needed. An appropriate tax structure will not only bring value to businesses and their shareholders and ensure tax compliance, it will also grease the wheels for an IPO. In contrast, the lack of a suitable tax structure could jeopardize the IPO deal or make it fall short of expectations.

Control and internal audit

Most international stock exchanges have very strict compliance requirements in this regard. Businesses need to immediately assess their capacity to comply with regulations of the target market and prepare processes, systems, policies and related functional teams. In many cases, control and internal audit compliance are major “barriers” to IPOs.

Strategic activities for capital markets and investor relations

As I explained above, businesses need to create a business story that makes a compelling case for their growth strategy, business model, development plans, financial forecast, market position, as well as structure of the Board of Directors and Board of Management.

At the same time, businesses also need to start building relations with reputable investment banks in each market to get the necessary support regarding valuation, underwriting or other strategic contributions such as assessing the market and reaching the target investor community.

Media and public relations, as well as ESG reporting

We all know that the image of a business strongly influences its valuation and that it is especially important when the business is pursuing an international IPO. Communicating in international markets requires distinct market insights. In some cases, businesses can consider hiring a reputable firm to support the implementation of related strategies and plans.

Besides, with global trends and calls for sustainable development, especially the commitments expressed at the 26th UN Climate Change Conference of the Parties (COP26), solid ESG compliance is becoming essential to maintain a good reputation and convince investors. Businesses should also be aware that some international organizations may use ESG to formulate their independent ratings.

Corporate governance

Businesses need to re-evaluate their existing frameworks and institutions related to corporate governance. These aspects include the capacity and effectiveness of the Board of Management and independent directors; standards and principles of corporate governance, shareholder structure, the audit committee; system and protocols for risk management, compliance management; and the checks and balances on the powers of the Board of Management and the Board of Directors. This review will not only help with complying with listing requirements, it will also support business planning to improve capacity or build related functions and teams.

Technology and cyber security

Last but not least, it is re-evaluating the effectiveness and efficiency of the technology system and cyber security. This is a vital aspect as the number of cyber breaches has increased significantly amid the COVID-19 pandemic. According to the latest EY Global Information Security Survey 2021, 77% of global cybersecurity leaders reported an increase in the number of disruptive attacks, such as ransomware, at their companies over the past 12 months, markedly higher than the 59% in the previous year's report. Businesses are also seeing a higher need to understand compliance requirements in their target markets.