London’s emergence as the preferred destination for companies seeking a secondary listing is a particular blow to US investors as it coincides with increasing demand in the US for foreign stocks and depositary receipts.
According to JPMorgan, institutional investment in the American depositary receipt market doubled between 2003 and 2006 to reach $600 billion, up from $500 billion in 2005.
The rise in interest has come about as a result of a fundamental shift in behaviour among US investors. Their holdings of non-US equities have increased to a record high of 18%, according to the Federal Reserve. Many leading investment advisers to US investors are now recommending allocations as high as 25% and in some cases as much as 35% to 40% in non-US equities.
"Whilst there has been no increase in new issuance there has been a strong increase in trading and investment in existing ADRs," says James Keane, EMEA region head of depositary receipts at JPMorgan. "Trading and investment in existing ADRs has reached record highs as US investors are allocating more to foreign equities and because ADRs are a very convenient way for them to hold foreign stock. There is also a pool of investors that’s obliged to hold foreign stock in ADR form as they are classed as domestic securities."
According to JPMorgan, the volume of depositary receipts traded globally rose to 57 billion shares in 2006, up 22% on 2005, thanks largely to a wave of new issues, particularly in London.
A record $43.1 billion in capital was raised through depositary receipts by 120 companies, of which $27.9 billion came from the primary offerings of 82 new issuers. US investors keen to invest in ADRs, however, are losing out badly as London’s share of depository listings in 2006 reached 60%, up from just 35% as recently as 2002/03.
Trendy London
The trend toward London-listed global depositary receipts is even more pronounced with respect to IPO issuers: nine of the top 10 capital raisings through depositary receipts in 2006 were in GDRs. The largest capital raising of the year was OJSC Rosneft of Russia, with $6.4 billion in capital raised, the biggest depositary receipt offering to date.
Europe and the Middle East accounted for 53% of all capital raised via depositary receipts, led by Russia and eastern Europe; the Asia Pacific region accounted for 38%; and Latin America (mostly Brazil) 9%. In total, Brazil, Russia, India and China accounted for more than 45% of depositary receipt issuance.
The preference for London-listed GDRs is expecting to continue in 2007, in part as a result of the impact of the Sarbanes-Oxley Act. However, pressure to change the highly unpopular legislation that has been blamed for much of New York’s perceived decline in competitiveness is growing. Even president George W Bush has joined in, in his State of the Economy speech on January 31.
In December, the SEC issued new guidance on complying with Section 404, the most controversial part of the legislation, which requires chief executives to certify that their company’s accounting procedures are flawless, or else to pinpoint their shortcomings. It also reintroduced a proposed rule on the deregistration of foreign companies caught in the Sarbanes-Oxley web.