December tends to be the time of year when market optimism is highest and sights are trained on the next year. Bankers and investors alike are full of hope that the ails of the past year can be laid to rest and the next will be more fruitful.
For the IPO market, going into 2023 there is little optimism. Most of the sources GlobalCapital spoke to for this article expect next to no activity over the winter, followed by only a handful of IPOs in the second quarter, but — tentatively — a second half recovery.
This forecast assumes, or perhaps hopes, that “things have stopped getting worse”, as Andreas Bernstorff, head of ECM at BNP Paribas, puts it.
For IPO markets almost everywhere it was a terrible year. In Europe, 154 IPOs raised €15.6bn in 2022 by November 15, an 81% drop in deal value year-on-year and the worst result since 2012. The flotation of German luxury carmaker Porsche alone contributed €9bn, grossly inflating the overall figure. European issuance was dwarfed by the Middle East, where 51 new listings raised nearly €20bn. Markets in Saudi Arabia and the UAE were so busy that GlobalCapital has a separate feature on it (see other pages).
The longest the IPO market has been shut in this century was for six quarters immediately after the 2008 financial crisis. “Intuitively, this situation is not as bad as then,” says Gareth McCartney, global co-head of ECM at UBS. “So we’re probably within one or two quarters of IPOs coming back.”
We’re gonna issue like it’s 2001
McCartney’s peers share this sentiment, despite popular apocalyptic comparisons to 2008. In terms of historic crises, bankers feel that the situation is more similar to 2001, when valuations crashed after the dotcom bubble burst, but the financial system itself remained functional and the IPO market slowly recovered without central bank intervention.
“We’re coming off a period of extreme valuations and we’re now in a devaluation or asset deflation bear market, which was what happened in 2001,” says Martin Thorneycroft, Morgan Stanley’s head of cash ECM for EMEA. “2008 was much more systemic, certainly for the financial industry, banks and investors.”
After 2008, central banks injected whatever money it took into economies to prevent collapse. “You saw markets in ECM go down and straight back up again,” says Bernstorff.
“By contrast in 2001, they dropped quickly and went up again really slowly. This feels much more like that because we’ve got the central banks pushing the other way and there is nobody who has an obvious problem.”
But the overarching message is that the environment is terrible. “The worst any of us has ever seen,” as one ECM lawyer says.
However, the system is healthy, so IPOs are bound to return eventually.
“Many investors are sitting on a lot of money,” says James Manson-Bahr, head of equity syndicate at Morgan Stanley. “Sounds extraordinary given the backdrop we are in, but there are new capital markets funds emerging in anticipation of the pipeline.”
In addition, a number of companies planned and then postponed listings in 2022, including well-anticipated names like Swiss skincare company Galderma and Europe’s biggest private equity firm CVC. These are at the top of the list of firms likely to consider going public throughout the year. Together, they form a pipeline for 2023 that Thorneycroft calls “as good, if not better than, any we have seen at any point over the last decade”.
However, things are not as straightforward as they may seem. Off the record, some bankers disagree with their house view and doubt whether governments will be able to control inflation, so that interest rates can stabilise and volatility will ease.
One banker in Europe says: “It won’t be an IPO year. It won’t be a block year. Primary capital raises will be a theme.”
Some of the excitement about a glorious pipeline may also have to be taken with some scepticism. “A lot of bankers are battling for their jobs,” says an ECM lawyer in London. “Funny things happen in those circumstances.”
The lawyer describes being asked to pitch for — and try to come on to — deals that never happened, “but people wanted to have something on the deal sheet for internal purposes”.
M&A banker Allan Bertie, head of European investment banking at Raymond James, provides a more peripheral view on ECM. “We don’t currently see the IPO market as a competition to M&A,” he says.
Instead, he expects listed companies to raise equity in follow-on transactions to fund acquisitions.
Investors, bankers and lawyers agree the future of European IPOs depends largely on interest rates.
“It all comes down to whether the central banks make policy mistakes or not, and they have had a track record of that in the past by keeping rates too low for too long,” says James Kinghorn, investment director for global equities at Nikko Asset Management in Edinburgh. “Hopefully this time they are a bit more practical and the interest rates that they are pushing now have the desired effect on inflation over the next few quarters.”
If governments can curb inflation, central banks can stop raising rates and volatility should subside, making IPOs possible again. If inflation proves stickier, however, and rates keep rising, there could be more rescue capital increases by struggling companies, especially in the real estate, infrastructure, and consumer sectors.
“If [real estate and infrastructure] assets are dependent on debt, their cost of funding has dramatically changed,” says Morgan Stanley’s Manson-Bahr. “If your average consumer is being hit by inflation and rising interest rates while wages aren’t growing in line with inflation, or they are being made unemployed, consumer companies could come up short, with a number of them highly levered.”
Market participants are aware of the possible scenarios. However, few are willing to predict which one will happen. With such an unpredictable environment, the second half of 2023 seems extremely far away.
On a more positive note, some expect the market to be more resilient to other macro risks. “We [the ECM market] have got reasonably immune to the geopolitical side of things,” says McCartney at UBS. “That’s not to say it can’t get worse, but we’ve had to go through Brexit, Trump, Ukraine — the market can manage that piece.”
Others remain more cautious. James Palmer, head of European ECM at Bank of America, suggests that the dynamics around Ukraine and Russia are not weighed in the way they probably should be. However, he says: “Ultimately it is the price of money and the rate cycle that are rightly the focus for investors.”
While market participants struggle to determine when the IPO market will recover, they are clear on how.
A few large deals will need to blaze the trail for the others. Porsche was too big and too unique to qualify. The carmaker’s €9bn deal was the largest IPO in Europe in more than 10 years. Through the listing, the Porsche family regained a 12.5% stake, while a sovereign wealth fund took another 5%, leaving only a small portion of the 25% flotation on offer for other investors. Apart from the family’s stake, the shares carried no voting rights. “It will be the larger companies, the easier to model, predictable companies that will come first,” says Palmer at BofA. “If they work, then you start moving from there.”
Slow progress
But progress will be slow.
Investors will be selective, and apply “high levels of scrutiny” but keep “a very open mind”, says Rob Leach, global head of capital markets and portfolio manager at Man Group.
“They’re going to be looking at stability, quality of earnings and cashflows across a number of sectors,” he adds. “It’s about finding high quality companies and management teams at compelling price points.”
Market participants particularly expect activity in healthcare, industrials, finance, and some parts of the consumer sector, and funding the energy transition will also be crucial. “But the dynamic is generally applicable across sectors,” says Palmer.
Leach says there is even potential for tech companies despite a battering over the past year. “There are parts of technology that are actually producing solid earnings while still displaying growth characteristics,” he says. “It is starting to become more interesting to look more deeply into the winners within the technology sector.”
Big US consumer tech firms, the pandemic darlings, are struggling. In mid-November, Netflix was down 51% since the start of the year. Alphabet had dropped 34%, Meta lost 67%.
There are outliers. UK cybersecurity firm Darktrace, listed in 2021, was trading up 3% since the start of 2022, outperforming the FTSE 100 that is down more than 2%. “Investors still like growth, they don’t like unprofitable growth,” says Thorneycroft.
Carve-outs will be an important theme, according to a head of ECM at a global long-only asset manager, as they come with a track record and a trusted management team. One example from next year’s pipeline is Thyssenkrupp’s hydrogen division Nucera.
At the end of 2021, before Russia invaded Ukraine and the energy crisis contributed to soaring inflation and to the threat of recession, bankers and investors expected markets to return to a healthier rhythm after the manic issuance in the wake of the pandemic.
Valuations were predicted to come down, investors to be more selective and to prefer profits to growth. For market participants, the crises of 2022 have made the path both longer and windier, but not reversed it.
“In periods of dislocation, it’s important to remember that even if markets look like they’re shut, life goes on and investors are still trying to make returns,” says Leach.
If so, perhaps a little December optimism is in order after all. GC