IPOs Maintain Appeal In A Multitrack World by Ernst & Young
After last year’s record-breaking level of activity, the volume of global IPOs in 2015 fell by 2% to 1,218 IPO listings and total capital raised declined by 25% to US$ 19 5.5b. Even excluding the Alibaba Group Holding Ltd. IPO in 2014, global proceeds in 2015 were 17 % lower than in 2014. However, rather than reflecting a lackluster performance, these global IPO activity levels illustrate the difficulty of surpassing a bumper year and compare quite favorably to the 10-year annual global median of 1,241 deals and US$ 17 6.1b in annual IPO proceeds. They also reflect divergent performance across regions in a higher volatility environment and the greater range of financing options now available.
Indeed, corporate confidence is high and fundraising continues apace even though IPO activity was unable to match last year’s records. 2015 saw the proliferation of alternative private and corporate capital, which increased the choice of funding choices for companies needing to scale quickly. A s a consequence, we believe that multitrack strategies are here to stay. In addition, the October 2015 edition of EY’s Global Capital Confidence Barometer1 found that companies are pursuing deals at a rate not seen this decade with global M&A value approaching record highs.
The growing diversity of the funding ecosystem has been evident throughout this year, with the US and Europe in the vanguard of the trend. We believe that these changes are an emerging structural trend, which will continue to be a crucial driver for global IPO activity in 2016.
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Predictions for the global IPO market based on activity in 2015
Structural change is taking place
The rise of alternative private financing markets operating at scale alongside the traditional capital markets in the US and Europe has impacted the number of technology companies listing. For example, technology IPOs on US exchanges were 47 % lower in 2015 by deal number and 27% lower by proceeds (when we excluded the US$ 25.0b IPO of Alibaba Group Holding
Ltd. in 2014) compared to 2014, raising only US$ 8.1b through IPOs, compared with an estimated US$ 20b through private offerings2 in the first six months of 2015 alone.
A number of factors are driving this trend. IPOs generally take at least two years to plan, but access to private capital is much quicker, enabling companies that need to scale rapidly with the chance to lock in the funding they need to generate competitive advantage sooner. Other factors in favor of alternative capital include the narrowing of the valuation gap between public and private capital (i.e., the difference between market valuation at IPO and at last rounds of fundraising prior to IPO), which makes it harder to achieve and sustain the first-day pop. Investors are increasingly prepared to invest greater amounts into private companies and at a later stage of their development. The investment protection sometimes offered to shareholders as part of private transactions lends further appeal to such deals. As a consequence, we may see the balance shift in favor of a new kind of IPO, in which bigger, more stable businesses come to the public markets later in their life cycle, driven not so much by funding needs, but by strategic motivations, such as securing a higher brand profile and the opportunity to access new markets via cross-border listing opportunities.
Multitrack is here to stay
With capital and choice abound, our EY teams have observed that private companies are increasingly looking to keep their strategic fundraising options open. Private Equity firms have been utilizing the multitrack strategy to maximize investment value for their exit for the last 20 years. Pursuing a multitrack strategy is an increasingly important trend that will gain in strength as companies weigh private funding options against trade sale, merger, acquisition or traditional IPOs.
Investors are adjusting to higher volatility
Stock market volatility, as shown by the Chicago Board Options Exchange (CBOE) Volatility Index® (VIX®), spiked higher between mid-August and September 2015, rising close to levels last seen during the market turmoil of 2011. Traditionally, levels of the VIX Index in excess of 20% to 25% have been associated with an increase in the number of postponed or withdrawn IPOs and a marked decline in global IPO activity. Volatility impacts the opening and closing of the IPO window in the short-term and stock market pullbacks amid increased volatility can also increase the relative attractiveness of trade sales and M&A compared with an IPO.
However, IPO activity snapped back sharply higher in October, suggesting that this historical relationship may now be less pronounced. Investors appear to be getting more comfortable with a higher volatility market backdrop — and in turn companies are gauging that investor appetite remains strong during these periods for new listings. In part this may reflect that in a financial system characterized by low returns across asset classes, investors retain their appetite for risk as a means of generating superior returns.
Nonetheless, spikes in volatility still retain the ability to shut IPO windows. T he market correction from mid-June to early July in Chinese equities prompted regulators to suspend IPO activity on Mainland China exchanges temporarily, which also acted as a brake on IPOs in Hong Kong. Market corrections in Chinese equities amid concerns over the slowing pace of Chinese economic growth also undermined investor sentiment in developed market equities, illustrating the increasingly interconnected nature of global stock markets.
Chinese activity w ill rebound as IPO window re-opens Chinese exchanges re-opened to new listings in December and there is a strong pipeline of IPO-ready businesses, with around 69 0 companies ready to go public. Investor sentiment has been buoyed by reforms to mainland China’s IPO system to be implemented in 2016, which will see a shift to a market-oriented registration process. 4Q15 IPO activity on the Hong Kong Main Market was strong, making it the world’s most active exchange by capital raised this year, and we expect a healthy appetite for new listings to persist in the coming year.
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