Investment bankers are bracing for another tough year ahead after losing out on lucrative fees from arranging stock sales, as the market for initial public offerings plummeted to its lowest level since the financial crisis of 2008.
With questions swirling around monetary policy and the prospect of a looming recession, IPO advisers are not holding their breath on a near-term recovery in the equity capital markets.
Global share sales plunged this year as the IPO market froze and hundreds of companies postponed stock market debuts, as Russia’s invasion of Ukraine and interest rate hikes from central banks weighed on the broader economy.
“It’s all about rates - the price of money changed and it has affected everything,” said James Palmer, head of EMEA equity capital markets (ECM) at Bank of America.
Banks have underwritten $515 billion worth of stock to date in 2022, a 66% drop compared with full-year 2021, according to Dealogic data.
Barring exceptions such as Porsche’s blockbuster 9.4 billion-euro ($9.97 billion) offering in September, most major deals including those of Swiss dermatology specialist Galderma and SoftBank Group Corp-owned chip designer Arm were postponed indefinitely.
IPO advisers, therefore, do not expect a rebound in new listings before the second half of 2023.
“We’re entering a new recessionary world we haven’t seen in a while,” said Valery Barrier, who co-leads Citi’s EMEA ECM franchise. “We’re going to see more primary capital being raised, more convertible bonds to cheapen the cost of financing and non-core shareholding being sold.”
As the cost of debt continues to rise, bankers expect companies to turn to other equity solutions as a way to manage their balance sheets and protect their corporate ratings. Recent examples of such deals include French videogame developer Ubisoft’s 470 million-euro convertible bond and Credit Suisse’s 4 billion Swiss franc cash call.
Banks are also hoping that a recent pickup in block trades and capital raising will spill over into the new year.
“Volatility has come down, so markets have the ingredients for issuance to pick up,” said Alex Watkins, co-head of ECM at JPMorgan for Europe, the Middle East and Africa (EMEA).
RATE HIKES DAMPEN SENTIMENT
Global equities slid last week following a string of hawkish announcements from major central banks. Some investors are betting that interest rates will start to plateau sooner than policymakers have indicated, as inflation shows signs of peaking.
The slowdown in IPOs has left a backlog of high-growth, yet unprofitable companies waiting to come to market.
“ECM activity tends to be higher in periods of distress or where growth is strong, and today we’re in no man’s land,” said Gareth McCartney, global co-head of ECM at UBS.
A return by long-only investors to capital markets deals is seen as key for any recovery, after a year in which hedge funds have taken a lead role as buyers of new issuance.
“It’s fair to say that at times throughout 2022 the accelerated book build (ABB) activity has seen proportionately more participation from hedge funds,” said Antonio Limones, head of EMEA Equity syndicate at Credit Suisse. “But long-only demand has started to increase.”
Other market participants are waiting to see where valuations settle before they commit to new deals, said Gerry Keefe, head of global banking for the Americas at HSBC.
The structure of transactions will also be a key factor in the success of future IPOs, particularly for private equity-backed companies that carry large amounts of debt.
“What you’ll probably see is deals come to market that are heavily de-risked, following in the footsteps of Mobileye in the U.S.,” said Lawrence Jamieson, head of EMEA ECM at Barclays.
The world’s biggest private equity firms, which were forced to postpone the floats of several dozen IPO-ready portfolio companies this year, are expected to remain circumspect for the next few quarters.
“A lot of this will come down to an assessment of the investment’s return profile, as well as overall relevant fund dynamics,” said BofA’s Palmer.
A bright spot for IPOs has been the Middle East, where privately held and state-backed businesses are turning to markets for capital and liquidity - such companies have raised more cash this year through IPOs than Europe and Africa combined.
Earlier this month, Saudi oil refiner Luberef priced its $1.3 billion share offer at the top of the initial price range on the back of strong investor demand. Restaurant operator Americana also pulled off a $1.8 billion dual listing in November.
However, a longer road to recovery awaits the rest of the world.
“When the stock market is going like this, people typically don’t buy new issuance,” said Joshua Bonnie, co-head of Simpson Thacher & Bartlett’s global capital markets practice.
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