The value of Japan’s initial public offering market dropped in the first half of this year to $1.7bn, the lowest level of flotations since the late 1990s.
Most IPO specialists see the fall as a temporary phenomenon, that has not been helped by unflattering comparisons with a bumper 2006 that saw $18.4bn of IPOs in 199 deals according to Thomson Financial. The number of IPOs also has slowed to 74 this year.
One factor behind the slowdown is that – in the wake of recent financial scandals – exchanges, lead managers and auditors have taken more care deciding whether or not a company is ready to list.
Japan’s big securities houses largely approve of the stricter scrutiny but they admit it has cut the number of companies moving to list. Kentaro Ito, IPO head at Daiwa SMBC, says it is “difficult” to predict total IPO numbers in 2007 but, in terms of quality, “it will be better than before”.
The recent bounceback in secondary small-caps has fuelled optimism about IPO quantity as well as quality. The Tokyo Stock Exchange’s Mothers market has recovered 17 per cent from a May low, after falling sharply from a January 2006 high following the scandal at Livedoor.
Optimists say a crackdown, to bring corporate governance among smaller Japanese companies up on to a level with best international standards, is good for the IPO market’s long-term health.
The snag is that recent Japanese IPOs have been relatively small – 21 per cent of the companies listed this year had an overall value of Y2.5bn ($20.4m) or less.
Doug Howland, Tokyo head of equity capital markets at Deutsche Securities, says “probably 80 per cent of IPO deals in Japan would be viewed as too small for capital markets in the US or UK. But in Japan small IPOs have thrived because they are dominated by retail investors”.