The parlous state of initial public offerings (IPOs) has been a source of much debate within the investment world for some time. Some have even proclaimed the death of the IPO. That seems somewhat extreme but does touch on the crisis within that market.
The current path of IPOs seems significantly more positive. Despite a challenging and unpredictable global economy and geopolitical outlook, the prospects for IPOs are predicted to vastly improve in 2024.
“We expect to see companies and investors put their toes in the water this year and start to test the temperature again after a good while away,” says Stuart Newman, capital markets partner at PwC UK.
A big factor is simply down to the fact that investor sentiment turned more positive towards the end of 2023, Newman says. This was largely due to gradually improving macro-economic conditions, particularly falling inflation and a stabilisation of interest rates with major central banks signalling the end of their respective hawkish monetary policies.
“This more optimistic macro outlook, reduced volatility and stronger than expected equity indices performance in 2023, together with a growing demand for exits all point to a potential re-opening of Western IPO markets in 2024,” Newman adds.
Depressed markets
There is no doubt that IPOs are coming from a place of exceptional weakness. Any such bounce will come on the back of a depressed market for new entrants in 2023. The London stock market saw just 23 companies list last year, a 49% decline on the 45 recorded in 2022, and represents the quietest year on record since 2010, when EY first started collating its data.
Breaking this down, the 23 companies that floated for the first time collectively raised £953.7m, down 40% from the £1.6bn new entrants shared a year earlier. The largest market debut in 2023 was CAB Payments, which raised £291.5m in July.
Interestingly, in the final quarter of 2023 there were no IPOs on the main market or Alternative Investment Market as the London stock market continued to be affected by the much cited headwinds of rising inflation, interest rate rises and geo-political tensions.
Putting this in context, Scott McCubbin, EY’s IPO leader in the UK and Ireland, says: “The challenging macro-economic conditions which drove a slowdown in overall M&A market activity in 2023 had a knock-on effect on IPOs, with a relative pause in activity towards the end of the year.”
And he notes that the stability of equity markets hinges on consistent conditions, which may limit a complete IPO bounce. “So whilst falling inflation and interest-rate reductions may ease in the first half of 2024, the upcoming UK and US elections in the latter half might delay significant IPO activities until 2025.”
That said, McCubbin points to reasons underpinning a potential IPO bounce. “The fundamentals of London as an attractive global listing destination remain strong, and pent-up demand for IPOs suggests we are likely to see an upturn in the market in the second half of the year as economic challenges continue to ease,” he says.
McCubbin also lists the FCA’s revisions to simplify the UK listing regime – particularly the increased emphasis on disclosure to empower investor decision-making – should also provide a boost and have been broadly welcomed by the market.
A global view
Looking at the IPO numbers on a global level, the stats make fascinating reading. Overall, volume fell 8% in 2023, with proceeds down by 33% compared with 2022. In total, 1,298 IPOs raised $123.2bn (£97.6bn) between them.
As to be expected, technology IPOs continued to have the highest proceeds, raising $32.2bn (£25.5bn). However, the sector saw declines driven by subdued investor reception to high-profile tech IPOs in the US and generative artificial intelligence (GenAI) startups still being at the venture capital stage.
The industrials sector had the most deals in 2023 at 265, while the consumer sector was the only sector to increase by IPO volume and proceeds, year-on-year.
Across the water, the picture was an encouraging one. The number of IPOs in the Americas were up 15% to 153 deals com- pared with 2022, with several high-profile deals helping to drive three-fold proceed increases to $22.7bn (£17.9bn).
While in the Asia-Pacific region, 732 companies raised $69.4bn (£54.9bn), an annual fall of 18% in volume and 44% in value, with mainland China and Hong Kong continuing to decline in volume and value.
Putting Europe with the IPO markets in the Middle East, India and Africa reveals a 7% rise in volume contrasted by a 39% decrease in proceeds with 413 deals raising $31.1bn (£24.6bn) in total. Interestingly, when identifying new IPO ‘bright spots’ the Middle East, Indonesia and India are cited enthusiastically by PwC.
The only way is up
Although looking at these numbers overall, one could suggest that an IPO bounce comes not from strength, but from the fact that it could not get any worse. In other words: the only way must be up.
But the positive outlook is built on something more and part of an on-going growth, says Dan Dees, co-head of Goldman Sachs’ global banking and markets business. “IPO activity, which has started to pick up in recent months, should accelerate in the back half of 2024, especially if the Fed starts cutting rates,” Dees says.
He makes the point that it is not unusual for the IPO market to open and close. When financial markets are strong, public offerings tend to be robust, and vice versa. “The environment for capital raising will be robust – because it has to be – in the years ahead,” Dees says. In essence, markets need capital. And IPOs feed that need.
Furthermore, a pipeline of IPOs could be coming based on data revealed by EY in October, which highlighted in a CEO outlook survey that 40% of private companies have transactions in sight over the next 12 months and are exploring an IPO as an option. This alone could easily boost IPO activity in 2024.
Plus, what is inevitably going to be a re-occurring theme in the new world of IPOs, is the issue of innovation. “We are in the age of innovation, of accelerating innovation. All that innovation needs to be funded,” Dees says.
Renaissance
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, shares the growing optimism that the IPO market is set to come roaring back to life.
“In 2024, the IPO market is potentially poised for a renaissance, opening up opportunity for investors,” she says. Several factors are to thank for this. “Firstly, technological innovation is driving unprecedented demand for fresh capital to fuel growth,” Lund-Yates says.
She also highlights the innovative nature of the market, which needs capital to fuel such developments. “From breakthroughs in AI to advancements in renewable energy, companies at the forefront of these rapidly changing industries are eager to tap into public markets,” she says.
At the same time, Lund-Yates highlights how regulatory reforms and investor-friendly policies are bolstering confidence in the IPO landscape.
“Governments worldwide are increasingly streamlining processes, reducing barriers, and enhancing transparency, creating an environment for companies to debut on stock exchanges,” she says. “This regulatory tailwind not only fosters trust among investors but also enhances the attractiveness of going public.”
A fundamental story
Another reason for optimism is that the global economic landscape seems to be returning to a slightly more even keel. Inflation is, albeit gradually and with some bumps along the way, moving in the right direction, which has helped settle market nerves.
Within this, George Chan, EY’s global IPO leader, has identified some investor trends. “Faced with tighter liquidity and a higher cost of capital, investors are turning to companies with strong fundamentals and a path to profitability,” he says.
In response, IPO prospects need to demonstrate their financial health and potential for value creation. “As valuation gaps narrow, investors are reviewing the post-listing performance of the new cohort of IPOs, which, if positive, could renew market confidence,” Chan adds.
For Chan, the picture associated with the ‘fundamentals’ view is vitally important. “Investors will continue to care more about the fundamentals, such as a strong balance sheet, healthy cashflows and resilience amid weak economic conditions rather than how fast the company can grow and how high the valuation could reach,” he says.
IPO candidates will, Chan says, need to be agile with innovative business models, be resilient when facing supply-chain constraints and macro-economic challenges, have strong working capital and be able to adapt to new ways of doing business by embracing technology and AI applications.
High growth, high risks
Reinforcing this analysis, Debbie O’Hanlon, EY’s private leader for the UK and Ireland, says market conditions remain challenging, but appetite for a public listing is high and smaller deals are having improved after-market performance.
“With many governments now taking measures to boost IPO activity – particularly in high-growth economies – it’s essential that IPO candidates focus on building fundamentals and managing price expectations to be ‘IPO ready’,” she says.
Investors though do need to proceed with a semblance of caution. There are issues that while getting in early on a stock that could go on to shoot for the moon could well mean strong returns, but younger companies also carry more risk. Many have yet to prove recurring profit generation or cashflow, making them less able to deal with the ups and downs of the market.
“Investing in a company listing shares for the first time can offer opportunity – getting in before valuations have had a chance to grow can be better than opting in when they peak. At the same time, investing in an IPO can be risky,” Lund-Yates says. Keeping an eye on the longer-term outlook of a company is important, she adds.
“Investing is for the long term, that’s at least five years – you need to have confidence in the long-term prospects of any company you’re investing in,” she says. Indeed, investing in IPOs, share offers and individual companies isn’t right for everyone. “It’s a higher-risk way to invest,” Lund-Yates says. “When a company first lists on the stock market, its share price can rise and fall quickly. If the company fails, you could lose your whole investment.”
Therefore investors need to do their research. “You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio,” Lund Yates says.
Testing valuations
So what sectors should investors be looking at? “Technology remained the most active sector for IPOs globally and, whilst we expect this trend to continue, IPO valuations will be tested as recent aftermarket performance remains mixed,” Newman says.
There are also other sectors that tick the correct boxes. “Given the current macro backdrop and remaining uncertainties, value sectors with defensive characteristics such as financials and green energy are also likely to get traction with investors,” says Kat Kravtsov, capital markets director at PwC UK.
For Chan it is ESG that makes IPOs appeal. “Investors are likely to be more interested in companies with an ESG concept and those that can demonstrate the adoption of AI application into the business models and operations,” Chan says.
Importantly, more than ever, Kravtsov says: “Investors are focused on profitability, cash generation and, ultimately, price range relative to peer valuations in their investment decision process.”
And Lund-Yates notes how investors are shaping the IPO market. “It is important to consider that investor preferences towards high-growth, disruptive companies fuel enthusiasm for IPOs.” That investor appetite for growth stocks seems key, as it is an area that continues to grow.
It does mean that the IPO market could well not just be back with a bang, but also much improved and nuanced.
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