As IPO volumes fall to their lowest since 2008, bankers don’t expect a swift recovery
LONDON/NEW YORK, Dec 2022 (Reuters) – After suffering a loss of lucrative fees from arranging stock sales as a result of the market for initial public offerings plummeting to its lowest level since the financial crisis that occurred in 2008, investment bankers are bracing themselves for another difficult year ahead.
IPO consultants are not holding their breath for a near-term revival in the equity capital markets as a result of the uncertainty surrounding monetary policy and the possibility of an impending recession.
The IPO market all but ground to a halt this year, as Russia’s invasion of Ukraine and interest rate hikes from central banks weighed on the broader economy.
As a result, global share sales took a nosedive this year. At the same time, the IPO market froze up, and hundreds of companies postponed their debuts on the stock market.
“It’s all about rates – the price of money changed and it has affected everything,” said James Palmer, head of EMEA equity capital markets (ECM) at Bank of America.
According to statistics provided by Dealogic, banks have underwritten a total of $515 billion worth of shares so far in 2022, which represents a reduction of 66% compared to full-year 2021 levels.
Barring exceptions such as Porsche’s blockbuster 9.4 billion-euro ($9.97 billion) offering in September, most major deals including those of Swiss dermatology specialist Galderma and SoftBank Group Corp owned chip designer Arm were postponed indefinitely, waiting for market conditions to improve.
Consequently, IPO consultants do not anticipate a rise in the number of fresh listings until the latter part of 2023.
“We’re entering a new recessionary world we haven’t seen in a while,” said Valery Barrier, who co-leads Citi’s EMEA ECM franchise. “We’re going to see more primary capital being raised, more convertible bonds to cheapen the cost of financing and non-core shareholding being sold.”
Bankers anticipate that corporations will start looking to various equity alternatives in order to manage their balance sheets and safeguard their corporate ratings as the cost of debt continues to grow. Recent examples of such offerings include the 470 million euro convertible bond that was issued by the French videogame maker Ubisoft and the 4 billion Swiss franc cash call that was issued by Credit Suisse.
Additionally, banks and major financial institutions are keeping their fingers crossed that the current uptick in capital raising and block trades will continue into the new year.
“Volatility has come down, so markets have the ingredients for issuance to pick up,” said Alex Watkins, co-head of ECM at JPMorgan for Europe, the Middle East and Africa (EMEA).
The week before last, there was a succession of hawkish pronouncements made by major central banks, which caused a decline in global equity markets. Because there are indications that inflation may have reached its maximum level, some investors are placing bets that interest rates will begin to level off sooner than what policymakers have said.
Because of the decline in the number of initial public offerings (IPOs), there is currently a backlog of high-growth companies that are not yet profitable but ready to come to the market.
“ECM activity tends to be higher in periods of distress or where growth is strong, and today we’re in no man’s land,” said Gareth McCartney, global co-head of ECM at UBS.
After a year in which hedge funds have dominated the market as buyers of new issues (raising capital through issuing debt or issuing stock) , the return of long-only investors to capital markets deals is considered as crucial for any potential recovery.
“It’s fair to say that at times throughout 2022 the accelerated book build (ABB) activity has seen proportionately more participation from hedge funds,” said Antonio Limones, head of EMEA Equity syndicate at Credit Suisse. “But long-only demand has started to increase.”
Gerry Keefe, the head of global banking for the Americas at HSBC, stated that other market participants are waiting to see where valuations settle before committing to new agreements.
In the future, the structure of transactions will be an extremely important aspect in determining the success of initial public offerings, particularly for private equity-backed firms that have significant sums of outstanding debt.
“What you’ll probably see is deals come to market that are heavily de-risked, following in the footsteps of Mobileye in the U.S.,” said Lawrence Jamieson, head of EMEA ECM at Barclays.
Because they were forced to delay the floats of several dozen portfolio businesses that were ready for an initial public offering this year, the largest private equity firms in the world are anticipated to maintain a cautious stance over the next few quarters.
“A lot of this will come down to an assessment of the investment’s return profile, as well as overall relevant fund dynamics,” said Bank of America’s Palmer.
In the Middle East, privately held and state-backed businesses are increasingly turning to markets for capital and liquidity. In fact, privately held and state-backed businesses in the Middle East have raised more cash through initial public offerings this year than companies in Europe and Africa combined.
On the strength of robust investor demand, Saudi oil refiner Luberef priced its $1.3 billion share offer at the top of the first price range earlier this month. The offer was priced at the top of the initial pricing range because in November, restaurant operator Americana was also successful in completing a dual listing with a market value of $1.8 billion.
On the other hand, the path to recovery will be much more uncertain and longer for the rest of the world.
“When the stock market is going like this, people typically don’t buy new issuance,” said Joshua Bonnie, co-head of Simpson Thacher & Bartlett’s global capital markets practice.
online sources: reuters.com, bankofamerica.com, dealogic.com
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