2018 saw the second lowest equity capital markets issuance in EMEA of the last 10 years. The number of EMEA IPOs declined 22% year on year. In the UK, the total number of IPOs, at 88, was below the 100 of 2017. Half of all the larger IPOs in EMEA that launched in Q4 were pulled, usually citing market and economic volatility. And many more decided not to proceed. The traditionally high levels of secondary placings in the fourth quarter were subdued. Should issuers preparing for ECM transactions in 2019 be concerned?
We wrote last year about our concerns on the direction of travel for global equity markets. The Financial Times’ Alphaville column, commenting in mid 2018 on a Bernstein quantitative strategy paper, was pretty credible when it stated that public equity markets are shrinking as a result of buybacks, delistings and lack of issuance. To which one could currently add the rumoured major cutbacks in domestic investment banking platforms in Europe, and the continued effects of MiFID II on sellside research.
While the structural challenges to listed equity which we identified are still present, we don’t think the 2018 wobble can be blamed entirely on systemic issues. There were specific challenges to getting transactions launched and over the line.
Firstly, the outlook for the European economy is gloomy, with the IMF’s global growth forecast being cut, citing Eurozone outlook as the cause. In an investing world that is increasingly consolidated and passive rather than active funds, a change in direction of travel for a global region naturally turns the fund flow taps off. That risk is heightened wherever a specific economic issue arises – as is the case for EU growth, or for the UK until post Brexit stability is achieved.
Secondly, the volatility level as measured by the VIX index was certainly spiky in the last quarter of 2018. However, the first third of 2018 saw almost as high and sustained a level of volatility as the fourth quarter, but with a lower IPO failure rate. The more likely trigger for poor deal outcomes in Q4 were the heightened global geopolitical and Brexit concerns translating into worries about GDP and corporate performance. Regional indices in Europe dropped more than 10% in the quarter, and the S&P fell by 14%. Which suggests trading sentiment and rational asset allocation decisions might have been a natural factor in closing the IPO market.
Thirdly, commenters have pointed frequently at the fear of a global equity bull run reaching its end, which depending on your frame of reference, runs back to 2015/2009/2000. To which I’d say, the level of global market capitalisation at the end of 2018 did indeed reset, but only reversed the last two years of the long bull run and these losses have been mostly recovered in 2019. A notable pause, certainly. But not necessarily cause for concern.
As further positive evidence, we’d note that the London Stock Exchange was successful in maintaining the number of Main Market domestic listed companies year on year, pushing back against the long term declining trend. The new entrants, included 15 UK Main Market IPOs with a market capitalisation over £100m in 2018, versus 12 in 2017. Including some sizeable and notable issuers such as Aston Martin, Quilter, and Vivo Energy.
The aftermarket performance of some UK IPOs does leave something to be desired, but the UK market’s resilience was achieved despite the fourth quarter’s poor IPO outcomes. It’s a great achievement, not least given the World Federation of Exchange’s 2018 summary says the number of listed companies in EMEA declined by 1.9%.
Reading the tealeaves for 2019
2018’s poor finish has carried into a slow start to 2019. The traditional January re-opening of the market, with fresh sentiment from rested investors, only started picking up in February. This time some place the blame on the US government shutdown which put on hold all 2019 IPOs (bar two) in the world’s deepest capital market. Which has potentially affected global sentiment.
However, advisors are indicating that IPO pipelines are more than usually solid with high quality candidates.
In the current market context, we’d highlight the following execution factors for companies and shareholders preparing for an IPO.
- Invest time internally preparing a coherent equity story which reflects the history, current performance and credible delivery of future upside. The IFR EMEA ECM Round Table of practitioners in October 2018 said “Investors are willing to buy IPOs, but want something they cannot already buy”.
- Consider up front whether a dual track process is prudent, and identify the resources required to run the parallel processes to a high standard. The same IFR ECM panel highlighted the competing bid from “more activity than in previous years from private takeouts pre IPO launch”. Which is unsurprising given the record levels of dry powder in the private equity industry.
- Minimise the company internal noise around any exit. By all means prepare to launch at short notice, but you may need to wait perhaps several months for an appropriate window. IPO markets may continue to be volatile, and windows of opportunity short. Which suggests senior executives’ expectations around the likelihood of an exit should be closely managed while the execution is ongoing. Bluntly, there is no deal until it’s signed.
- Most importantly, keep running the company. A successful outcome is not certain until it’s 100% delivered – and if it does happen, management are expected to carry out the business plan they have been marketing.
As always, The Deal Team’s professional transaction managers are here to support the company executives with the minimum of distraction in preparing for the likely exit, whether M&A or ECM. Creating long term value by giving shareholders and management teams back their time.
Please note – We’ve used our judgement to select the linked external information which we believe may be of interest. We are not however responsible for the accuracy, completeness or relevance of the information and opinions contained therein.