The FINANCIAL — Global IPO activity in the second quarter of 2015 picked up compared to the first three months of the year, up 61% by proceeds and 37% by deal number, but the IPO market in 2015 so far has been lacklustre, especially in the US and Europe. By the end of the first half of 2015, deal numbers had reached 631 IPOs, a 6% increase on the same period last year. However, at US$103.7b, total capital raised was 13% lower than during the first half of 2014, according to the quarterly EY Global IPO Trends: 2015 Q2.
A number of factors underpin this subdued activity. New listings this year in the US and Europe have not matched the overall pace of the first half of 2014; while the number of financial-sponsored IPOs worldwide has also dipped – there were 123 private equity and venture capital backed IPO deals raising US$32.7b in capital in the first half of 2015, down 38% and 48%, respectively, on the same period last year. Globally, mergers and acquisitions (M&A) are soaring, providing an attractive alternative to an IPO listing – the monthly M&A deal value reached an eight-year high in April and May with 2,879 deals announced worth US$399b in April and 2,653 deals with announced and intended deal value over US$400b in May. Meanwhile, in some sectors (principally technology, which is generally an IPO stalwart) the private market has overtaken the public market. In 2015 so far, US venture-backed technology companies have raised just US$1.8b from nine deals through IPOs but US$20b through private offerings.1
Maria Pinelli, EY Global Vice Chair, Strategic Growth Markets, says:
“Despite the cooling market, we do not believe the pattern of IPO activity in 2015 reflects a widespread lack of confidence among dealmakers. Instead, it reflects an ongoing pause for breath while entrepreneurs and managers evaluate the broad range of funding options currently available.
“Reflecting the overall health of the funding ecosystem, IPOs are currently just one choice among a widening range of options to create and realize value. As M&A activity surges, we will see more companies choosing to keep their options open by pursuing a multitrack strategy assessing mergers, trade sales and the wealth of private funding options alongside more traditional IPO possibilities to deliver optimal value to shareholders.
“Private capital is an attractive alternative to IPO, and there are now many more players looking to capture pre-IPO growth, from VCs, to hedge funds, growth capital investors and mutual funds,” says Pinelli. “This interest has given rise to the term ‘private IPO’ to describe IPO candidate companies accessing capital from private investors.”
US lull impacts global total
The slowdown in US listings is the biggest factor impacting global IPO activity. In the first six months of 2015, the US saw 101 IPOs raise proceeds of US$19.7b, down 36% by deal number and down 45% by proceeds, from 158 deals with a value of US$35.4b in the same period last year. As a result, NASDAQ is now the third-busiest exchange globally and NYSE the fourth, while Shenzhen Stock Exchange and Shanghai Stock Exchange are first and second, respectively, by deal numbers.
“In the first half of 2015, US IPO activity has not matched the pace of 2014 – the busiest year since 2000,” says Pinelli. “There is no doubt that the growing appetite for and availability of private financing is having an impact on the flow of IPOs, especially in the technology sector, as investors look for returns in innovative businesses. However, the pipeline is refilling across a range of sectors. We have seen strong activity in the second half of June and expect this momentum to continue is 2H15.”
China leads Asian IPO boom
With 355 IPOs raising US$48.4b in the first half of 2015 – up 66% and 48% on the same period last year – Asia Pacific was the most active region by both number of new listings and capital raised. A number of countries, including Japan, Australia, Thailand and Malaysia, have seen companies raising capital on the public markets, but China has been the key driver.
So far this year, there have been 239 IPOs raising US$40.0b on Greater China exchanges, an increase of 132% in deal number and 141% by proceeds compared to 1H14. In 2015, Greater China exchanges have accounted for 38% of global IPOs by number of deals, and 38% by capital raised, with the Shenzhen and Shanghai exchanges ranking first and second in the world in 1H15 by number of deals.
“Strong capital markets and positive market sentiment are driving activity in Greater China, and as new regulations open up China’s markets, we expect the number of IPOs to reach an all-time high by the end of the year,” says Pinelli. “With Japan also on course to see a record number of new listings in 2015 and momentum building on ASEAN exchanges, the breadth of investment opportunities in Asia Pacific is unprecedented.”
Europe drops back due to increased uncertainty
Although EMEIA led the world in terms of capital raised in the first quarter, figures for the half year were subdued. With US$34.7b raised in a total of 165 IPOs, the region ranked second globally on both measures but was 29% down by proceeds and 24% down by number of deals compared to 1H14. Europe, and in particular the UK, has driven this slowdown, with proceeds down 32% and 67% and deal numbers down 27% and 51%, respectively. Despite this, EMEIA exchanges hosted four of the global top 10 deals in 1H15 (three in 2Q15) while valuations held up. Some 99% of IPOs in EMEIA main markets priced within or above expectations and delivered on average a 12.7% first day “pop.”2
“After a slow start to the second quarter, the first half of the year has been subdued overall,” says Pinelli. “IPOs are likely to come under increasing scrutiny as an exit option as more companies take advantage of the buoyant M&A and private markets. In addition, a marked increase in volatility due to heightened tensions in Russia and the continued uncertainty surrounding Greece mean that investor confidence is clearly being hit. We won’t know what the prospects are for the remainder of the year until this uncertainly reduces, something we’d expect to happen as the summer progresses.”
Sector breadth persists as financial-sponsored IPOs drop back
One clear indicator of the overall health of the public markets is the broad spread of industries bringing companies to IPO with no sector individually accounting for more than 20% of IPOs globally in 2015. The top three in terms of deal number were industrials (119 IPOs, 19% of global IPOs), followed by health care (97 IPOs, 15%) and technology (94 IPOs, 15%). In terms of capital raised, industrials was the leading sector again, raising a total of US$19.4b, 19% of global IPO proceeds. Other active sectors were financials and energy, which raised US$18.6b (18%) and US$10.3b (10%), respectively.
In contrast, the level of financial-sponsored IPOs worldwide has dipped after a record 2014. In the first six months of this year, private equity and venture capital-backed listings accounted for 32% of the global total by proceeds raised and 19% by volume compared to 53% and 33%, respectively, a year ago.
Pinelli concludes, “Overall, while the pipeline is rebuilding, we believe that the amount of investment going into pre-IPO companies may change the IPO market in some sectors, with IPOs taking place when companies are bigger, more stable, and with more established business models that deliver the sequential quarterly growth that public market investors expect and reward. This is something that investors should welcome. With this private capital being invested now, we’d expect to see some of these companies entering the public markets in 2016 and 2017.”
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