One of the features normally associated with a stock market approaching an all-time high is a healthy pick-up in the market for Initial Public Offerings (IPOs). After all, if investors are pricing existing equity at new lofty levels, surely they should also be keen to access some new equity, should it become available? However, this doesn’t seem to be happening at the moment, potentially bringing into question the foundations of recent equity market strength.
In the UK, fitness company Pure Gym recently pulled its planned listing and there has been a reduction in the valuations being sought for companies such as Misys (banking software) and Biffa (waste management). Why would this be, a mere week after the FTSE 100 hit an all-time high?
Brexit could be one cause. Uncertainty triggered by the UK’s EU Referendum vote is making it more difficult than normal to forecast the outlook for company profits, which is then being reflected in the valuations of new deals.
It is worth remembering that there will always be some mismatch between the expectations of those selling the shares in these businesses and the institutions being asked to part with their clients’ cash to buy them. However, in the UK at least, there may also be an element of weariness towards some of the IPOs being presented. Along with Misys and Biffa, this quarter’s slate includes mobile phone company O2. All of these companies have been on the public markets before. Investors know these companies well and have a strong view as to what they are worth. In addition, buyers are often circumspect about what has been happening within a company when it’s been private, and will look carefully to check that its private owners have been good corporate stewards.
Uncertainty triggered by the UK’s EU Referendum vote is making it more difficult than normal to forecast the outlook for company profits.
And what of the situation globally?
The IPO year started slowly – if we look back to January, investors were fretting about a US recession and the prospects for a “hard-landing” in China. Neither of these events have come to pass (yet) – but it resulted in a poor start to the year for new issues. This, allied to some of the circumspection noted above, has left activity significantly lagging 2015 levels. The Ernst & Young Global IPO trends survey notes that IPO proceeds of $79.4 billion are 39% lower than in the same period last year, and deal volumes are down 23% to 704 IPOs from 913 in the same period last year.
Of course, within these figures, there were some significant regional variations. In the Asia-Pacific region, there has been an increase in both deals and proceeds each quarter this year. For the first nine months of the year, it outpaced Europe and the Americas, representing a global share of over half both deal volume and proceeds.
The US has been a more muted market this year, perhaps driven by a desire from investors to get the presidential election behind them. There remains much speculation as to when (if ever) any of the (mainly technology driven) ‘unicorns’ will come to the public stock markets. But the elusive beasts have not been seen in 2016 so far.
It is important that the IPO market works well – it is the mechanism for backers of private capital to re-cycle that capital. But at the same time one should always expect some competitive tension in this market between enthusiastic sellers and circumspect buyers. It will be interesting to see how that tension is resolved in the final quarter.
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