IPOs stall amid market fears

The number of privately held companies looking to go public stalled globally in the first quarter of 2016, representing the slowest start to a year since 2009.

Proceeds fell by 65 per cent, to €12.5 billion, according to analysis by professional services firm PwC.

At least nine European IPOs (initial public offerings) were either publicly postponed or withdrawn in Q1, representing 16 per cent of all deals, as IPO and debt markets battled strong headwinds created by historically low oil prices, a slowdown in the Chinese economy, and uncertainties around US interest rates, it said.

IPO activity in Europe fell back to the levels seen in early 2013, with Q1 2016 seeing just 50 IPOs, raising €3.5 billion, in the first quarter.

Only three exchanges hosted IPOs raising more than € 50 million (London, Nordic exchange OMX and Germany’s Deutsche Börse), compared to nine in Q1 2015. Europe is also still waiting for its first €1 billion+ IPO of 2016, after 2015 was dominated by 14 mega IPOs.

According to PwC’s IPO Watch survey, London experienced a 50 per cent drop in activity from already subdued levels at the end of last year.

Yet the London exchanges continued to be the most active in Europe, it said, with 18 IPOs raising €2.3 billion, representing about two-thirds of total European proceeds.

There are some positive indicators. “Despite challenging market conditions, companies with strong equity stories and good management teams have successfully completed their IPOs,” says Denis O’Connor, transaction services partner, PwC Ireland.

However, with uncertainty surrounding ‘Brexit’ and the traditional hiatus of the summer break period approaching, the immediate outlook is unclear.

“The pipeline of companies preparing for IPOs towards the end of 2016 and into 2017 looks generally healthy, but as the IPO window begins to close, [and] we get closer to the EU referendum and traditional summer break, we expect that there will be increased volatility where people won’t want to price IPOs,” he says. Market conditions have also led to an increase in the number of postponed deals, with companies facing market volatility and “challenging valuation discussions” compared to their listed peers. As well as a significant number of European IPOs postponed or withdrawn in Q1 2015, trade sales have continued to divert owners from the listing route.

“This quarter has proven to be challenging for IPO activity but that’s not to say we don’t see a diverse pipeline for the end of 2016 and early 2017,” says O’Connor.

“We expect that candidates in the financial sector, mainland European privatisations and strategic demergers will contribute their fair share to overall annual proceeds. But with the EU referendum looming, uncertainties still remain, and we do not expect to reach the € 10 billion mark before the summer break and this reflects a return to the levels seen in the first half of 2013, before the recent boom of the last two years.”

‘Wait-and-see’ approach

Rival professional services firm EY puts global Q1 IPO activity down 39 per cent by volume and 70 per cent by value, with deal sizes getting smaller amid volatile market conditions. IPOs are particularly sensitive to volatility and general negative economic sentiment, it said, with the result that companies are exploring other options or simply taking a ‘wait-and-see’ approach in the hope that confidence will return.

One alternative is mergers and acquisition which, “while softening on 2015’s stellar performance, is currently faring better than IPOs with a less steep decline in activity,” it said.

This ‘wait-and-see’ approach is evidenced by the fall in the proportion of private equity and venture capital-backed IPOs globally, down 80 per cent from Q1 2015 to Q1 2016 by number of deals.

Technology IPOs were also down compared to Q1 2015 (24 per cent worldwide in Q1 2016), while in the US there were no IPOs in this sector in the first quarter, as technology companies and their pre-IPO investors wait to realise their valuation of a company at a later date.

“In the current climate, both IPO-ready companies and potential investors are in effect sheltering from volatile, gloomy weather and waiting for the outlook to improve,” says Martin Steinbach, EY EMEIA IPO leader.

“This explains why there have been more postponed IPOs in the first quarter this year than last year, why deal sizes have fallen and why financial sponsors are biding their time for the exit environment to improve, which is always a sure sign that these sponsors think better times are ahead.”

EY predicts global IPO activity will improve as the year progresses, helped by the fact that the US Federal Reserve is expected to moderate its interest rate hikes, while the ECB provided additional stimulus in early March. China, too, has eased monetary policy with a further cut in reserve requirement ratios and is likely to react to lower growth expectations with further supportive measures, it said.

Ireland saw four IPOs in 2015. Life sciences company Malin raised € 330 million and petrol retailer Applegreen €70m. Permanent TSB rejoined the MSM (main securities market) with a €400 million share-raising while Hostelworld, the online booking platform for hostels, raised €180 million.

And, while there have been no IPOs so far this year, the Irish Stock Exchange’s IPO-ready programme, which supports entrepreneurs and companies preparing for a stock market listing, had a successful launch last year.

Aimed at CEO and CFOs, it provides opportunities for up-skilling in such areas as raising capital, investor relations and business management and, with 10 participants in its inaugural programme, should strengthen the IPO pipeline here.