Cash & Investment Management

Global IPO Market – Q3 2016

Friday 16th September 2016

An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded. Quite often governments sell stakes in state owned companies, you only have to remember the privatisation flurry in the UK of the likes of water companies, British Gas and British Telecom. IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data to use to analyze the company. Although IPO offers many advantages for the company listing, there are also significant disadvantages, chief among these are the costs associated with the process and the requirement to disclose certain information that could prove helpful to competitors.

Global IPO (Initial Public Offering) proceeds thus far in 2016 are running at just below $50 billion, this is way below the average experienced in the last decade. There are clearly some important months to follow before the calendar year closes but there will need to be an acceleration in issues if we are to surpass the previous low year, which was 2008 when $85.2 billion was raised in new issues. To put this into context, the peak year was 2007, when $266.6 billion was raised, closely followed by both 2010 and 2014, when on average $240 billion was raised. Why is this year so poor? Liquidity levels amongst investors are high, equity markets such as the US are near all-time highs and global economic growth is steadily growing.

To some extent, the very fact that liquidity is plentiful means that companies can gain finance from private means, rather than having to raise equity on the markets. At the same time, regulatory changes have simultaneously made it easier to stay private and harder to be public. There are also signs that investors have become highly sensitive to valuation levels, which for certain sectors (notably technology) have simply been too high. The performance of those companies that have listed in the current year is also an important factor, with around 25% of these issues currently trading below their issue price. The Brexit vote in the UK created a short to medium term paralysis and this has been combined with US Presidential elections later in the year. Biotechnology companies accounted for a major boost to IPO’s in 2015, however with more scrutiny on pricing in the sector and profit taking, the sector has been a poor performer in 2016. 

In the US, there have been increasing signs that the private equity sector are looking to cash in more of their investments. Nearly one-third of all IPOs in the second quarter of 2016 were private equity-backed, reflecting the heightened activity in sectors that have historically been popular for private equity, such as the industrial, technology and consumer industries. This is roughly in line with historical trends and represents a return to form after a languid first quarter where private equity firms remained on the side-lines. Additionally, venture capital backed nine IPOs, a slight increase over the first quarter’s six venture capital-backed deals.

In Asia, we could well see the largest IPO of the year take place as the Postal Savings Bank of China has launched the biggest initial public offering since the record float of Alibaba two years ago, in a deal that could raise up to $8.1bn in Hong Kong. The bank has a staggering 505 million retail customers and is the fifth largest Chinese lender by assets. The IPO is being supported by other state influenced companies, these ‘cornerstone’ investors are CSIC Investment One and Shanghai International Port Group, who have agreed to invest $2.2 billion and $2.1 billion respectively. Victory Global Group, a unit of aviation conglomerate HNA Group, will buy $1 billion of shares, while other cornerstone investors will buy smaller stakes. Interestingly, it has only been the Chinese state influenced companies that have really raised any funds this year.

In Japan, the government is looking to list the railway company, JR Kyushu for $3.8 billion, although the business also generates significant revenues from hotels and property. After privatization, JR Kyushu diversified its business into new ventures such as fish and mushroom farming and car sales. Two of its more successful side ventures were the Beetle ferry, started in 1991, and the Trandor bakery chain, started in 1992. As well as operating the iconic ‘bullet trains’ the company operates local services and trade has been buoyant with strong domestic passenger growth as well as healthy tourist revenues.

There are also signs in the UK that following the Brexit vote that investors are trying to get back to normal. Amounts to be raised at the moment look relatively small but companies include the basic fitness group Pure Gym is looking to raise about $250 million. Waste management company Biffa plans to raise $360 million, which could give the company a £1bn valuation, while Hollywood Bowl will be valued at about $320 million. Among bigger potential flotations, Telefónica, the Spanish telecoms group, is looking to list its UK arm O2, which could be valued as high as $13 billion. Financial technology business Misys is also looking at a multibillion-pound flotation.

Europe is also starting to thaw with one of the largest digital payments providers in the Nordic region listing in Denmark. Nets is trying to raise over $800 million, which will provide the company with a total valuation of over $4 billion. The next challenge for Nets will to navigate an increasingly competitive online payments sector that includes card network rivals Visa and MasterCard as well as payment processing companies such as Worldpay and Wirecard and Danske Bank’s Mobilepay service in the Nordics.