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22 Aug 2019, Stella Zlatareva, EMIS M&A Team

Massive valuations of tech firms in EMs may lead to spate of IPOs in near future

Let’s face it: the top-drawer list of tech companies with the largest market capitalisation is mostly reserved for U.S. players. As of mid-August 2019, there are only two firms based in emerging markets that form part of the top 10 in the industry by market cap – Alibaba and Tencent. Nevertheless, since 1996 when the world’s largest internet company Amazon was set up, the company atop that list has changed eight times. While emerging economies have a long way to go before they can catch up with behemoths like Microsoft, Apple, and Amazon in the market cap race, the fleeting nature of market valuations makes one wonder.

With the record amounts of venture capital and private equity funding flowing into start-ups and the resulting sky-high valuations, the rate of market value creation is astounding. The trend holds equally true for tech companies in developed markets as well as for emerging economies. What we are observing is an abundance of start-ups raising multimillion dollar rounds, going public, and/or being acquired by giants that until recently were on the same jaw-dropping fundraising path (case in point - Uber taking over Middle Eastern rival Careem for USD 3.1bn). While most of the media fuss goes to the money raised by the likes of Uber, Lyft, WeWork, Airbnb and their IPOs, there has been a lot going on in emerging markets (EMs), too. Tech companies from EMs raised a whopping USD 45bn in IPO proceeds between January 2018 and July 2019 and some of the biggest listings over that period came from those based in China, Hong Kong SAR, and Brazil (China Tower, Xiaomi, Foxconn Industrial Internet, Meituan Dianping, PagSeguro, and iQiyi.com). In addition, various companies, e.g. Rappi, Nubank, Didi Chuxing, Grab, MercadoLibre, Face++, and Traveloka, raised billions as part of funding rounds that are seen as a precursor to going public. All of these developments go to show that many of the technology IPOs in the near future may come from companies active in EMs.

A possible explanation behind this phenomenon was proposed by investment firm Rise Capital. It refers to some large emerging countries, which over the past few years have reached an internet critical mass equivalent to 50 million active users. Said stage was reached by the U.S. and China in 1996 and 2002, respectively, and it created enough scale and revenue generated online as to unleash a wave of tech listings that is continuing to date. By that logic, countries that recently arrived at an internet critical mass, such as Brazil, Mexico, India, Indonesia and Nigeria, will likely also experience a major market cap creation through IPOs. Rise Capital estimates that EMs other than China could create between USD 1tn and USD 2tn in market cap in the coming ten years, so be on the lookout.

Original source: EMIS - DealWatch