The global market for initial public offerings is showing signs of life as a rebound in the stock market has emboldened companies to test investor appetite for new listings, particularly in Asia. But a full-fledged recovery looks distant.
About $25 billion worth of IPOs priced globally in March and April, nearly twice the amount seen in the first two months of the year when listings virtually ground to a halt, according to data compiled by Bloomberg.
Issuers from Hong Kong to Milan saw a window of opportunity with the decline in market volatility, according to analysts.
Activity was particularly buoyant in Asia, where regional exchanges accounted for nearly 80 per cent of new share sales in April.
Listings in Europe also picked up.
But concern about a recession has deterred US issuers, slowing a full-fledged recovery.
Deal sizes on average were smaller, and the money raised so far this year remains 51 per cent below the same period last year.
“We are beginning to see green shoots of activity with companies restarting processes that were on hold, but there is still a fair degree of uncertainty in the market,” said Jason Manketo, global co-head of law firm Linklaters’ equities practice.
“The buy side is keen to see results for a couple of quarters before committing to an IPO. This means the potential pipeline of some 2023 deals has been moved out to 2024.”
Drilling down into the data, Asia is handily the busiest area for offerings in the world right now. But in a key change compared to 2022 — when the vast majority of large-sized deals were concentrated in mainland China — issuance is coming from a broader area of Asia this year.
Indonesia has been the brightest spot with a pair of nickel producers surging in their debut.
Rakuten Bank soared after raising 83.3 billion yen ($623 million) in Japan’s largest IPO since 2018 — though, the pop came after the initial price range had been cut. And KKR-backed Chinese liquor company ZJLD Group on Thursday priced Hong Kong’s largest offering of 2023.
“The IPO market is coming back gradually and slowly. It is not 100 per cent back yet, but there are signs of life and renewed vigour,” said James Wang, co-head of equity capital markets at Goldman Sachs Group in Asia, excluding Japan.
Europe’s IPO market has been moribund, with 2023 activity down about 12 per cent from the same period last year when Russia’s invasion of Ukraine brought listings to a screeching halt.
Poor IPO returns have been a major deterrent for investors. Portfolio managers have been driving hard bargains on valuations and refusing to pay top dollar for new, unproven companies.
Plus, the sudden meltdown of Credit Suisse Group, which ignited a global market rout last month, has added to investor worries about interest rates and inflation, further muddying listing plans.
But there have been signs of gloom lifting. Most notably, Lottomatica, the Italian gambling company backed by Apollo Global Management, opened books last week for a €600 million ($657 million) IPO, becoming the third large firm to tap European exchanges this year.
In addition, German web-hosting company Ionos and electric motor component maker EuroGroup Laminations have managed to raise more than $400 million in the region, though both stocks have struggled after making their debut.
Still, the outlook for IPOs in the US remains challenged. Only $4.1 billion has been raised for companies listing on US exchanges this year, with three — Nextracker, Atlas Energy Solutions and Enlight Renewable Energy — accounting for a third of that amount.
In fact, outside that cluster and a dozen special purpose acquisition companies that have made their debuts this year, the vast majority of new listings would be qualified as penny stocks.
“We’re still in an uncertain world and uncertainty is the worst thing for new issuances,” said Greg Martin, co-founder of Rainmaker Securities, which enables secondary transactions for private companies.
Evidence is mounting the US may be headed towards a recession and the US Federal Reserve’s path forward on interest rates remains unclear.
“How do you price a deal when you don’t know what the cost of capital really should be on a forward-looking basis,” said Patrick Galley, chief executive and chief investment officer of RiverNorth Capital Management.
“Some clarity over interest rates is key.”
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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