The IPO: from Hero to Zero? - Arshiya Hendi

Introduction

Remarkable, outstanding, busy. These are just some of the words used to describe the record-breaking year for initial public offerings (‘IPO’) in 2021. In total, 2682 companies went public, raising $608bn.

Uncertainty, fear, reluctance. These completely juxtaposing words have been used to describe this year so far where macroeconomic headwinds, increased market volatility, and post-IPO performance failings from previously successful companies have made businesses reluctant to go public, and have even seen many falling back into private hands in public-to-private transactions ('P2P').

This article will provide an overview of the current global IPO market, explore its emerging trends, and examine an anomalous success story in the current bearish environment. It will conclude by looking ahead to what to expect in 2023.

What is an initial public offering?

Firstly, we should remind ourselves what is an IPO. In brief, it marks the transition of a private company to public status, where its shares are offered to the public for the first time. After being sold at the issue price on a primary market to investors by the investment banks that underwrite the IPO, these shares begin trading on a secondary market such as the New York Stock Exchange (‘NYSE’) or London Stock Exchange (‘LSE’).

Going public offers advantages. A company can use additional capital raised from public investors to expand their business or fund research and development (‘R&D’). Moreover, public status provides the company with more publicity and prestige, which may increase sales or enable the company to agree more attractive terms with lenders. However, with these pros comes several cons in the form of disclosure requirements, the need to answer to shareholders, the costs associated with the IPO itself, and more stringent reporting obligations.

Overview of the global IPO market

The first nine months of 2022 have shown a stark contrast with the unprecedented success of IPO activity during the bullish pandemic market. The reasons for the downturn are twofold: first, the current macroeconomic turmoil, caused by the war in Ukraine, which has dulled investor interest in capital markets; and second, the failure of many companies that went public during the COVID-19 bull market. These will be covered in turn.

Globally, year-to-date (‘YTD’) 2022, there have only been 992 IPOs raising $146bn, a 44% decrease in volume and a 57% decrease in value year-over-year (‘YOY’). This reduction in activity has been felt hardest in the US where YTD 2021, IPOs raised a monstrous $134.1bn, compared to the $7.5bn raised from only 116 IPOs YTD 2022. In the third quarter of this year, only 37 companies in the US braved market conditions and put their fate into the hands of public investors, while in the first nine months, 60% of US IPOs that were scheduled to take place in 2022 were withdrawn. European markets are quiet too, with a 76% drop in proceeds YOY. The stark contrast between the first half of 2021, where €44.6bn was raised, and the same period in 2022, where €4.8bn was raised, underscores companies’ reluctance to go public in these uncertain market conditions.

However, not all of the world has experienced such a remarkable collapse. The first half of 2022 saw 178 IPOs in China’s A-share market, which raised $40bn. This marked record figures for the period since 2011 and accounted for 39% of total IPO volume, rendering China the dominant market in the first half of 2022. In the Middle East YTD, despite a 51% drop in IPO volume of 51%, there has been 209% increase in proceeds. APAC itself raised $100.8bn from 608 IPOs YTD 2022, which does not represent such a downturn YOY as other regions when compared to the $128.7bn raised from 816 IPOs in the region YTD 2021.

A drive towards P2Ps?

This year has also seen the re-privatisation of many companies that went public during the pandemic bull market, reflecting their disappointing performance. As of the 18th of October 2022, 75% of the US companies that listed between 2019 and 2021 are currently trading below their listing price. These include companies such as Deliveroo and DoorDash, which are, YTD, down 53% and 63% respectively. The freefall of such stocks presents tempting valuations for private equity (‘PE’) firms who currently have record supplies of ‘dry powder’ ready to deploy: $1.2tn as of the third quarter of 2022.

Business software company, ForgeRock, is one of many companies to have gone through this process. Following a successful IPO on the NYSE which saw its stock price double, placing the company’s value at $4bn, 2022 brought a freefall which left the price of its shares at just half of its listing price. Now, ForgeRock have accepted an offer of $2.3bn from PE firm Thoma Bravo, only 13 months after a successful but short-lived IPO.

PE is not the only beneficiary. Many cash rich corporations have taken full advantage of the opportunity to engage in M&A to grow their companies at a discounted price. For example, South Korean conglomerate Naver has agreed to acquire Poshmark for $1.2bn - a near 60% discount to its IPO price.

Things are worse on the LSE, where current market conditions have exacerbated the ongoing de-equitisation of the UK market. The de-listing of UK issuers has long outweighed IPO deal values, and 2022 has been the worst year on record:

In the first three quarters of 2022, the London IPO market only raised £574m, challenging the lows of 2009, where only £1bn was raised. This graph shows the comparison with previous years:

Given the weakness of sterling, which has dropped 12% YTD against the dollar, further privatisation by overseas buyers is expected, capitalising on the discounted price of UK stocks. A recent example is US PE Firm Energy Capital Partners’ agreement to acquire waste management firm Biffa for £1.3bn.

Therefore, as interest rates rise, geopolitical risks intensify, and the cost-of-living crisis continues, companies will be forced to make a decision: cash out to PE firms or competitors at a discount? Or ride the predicted recession?

The Diamond in the Rough: Porsche (P911)

In the midst of a disastrous year for IPOs, one company has defied the odds and succeeded: Volkswagen’s (‘VW’) IPO of Porsche on the Frankfurt Stock Exchange (‘FSE’).

VW had been in talks with Porsche about a potential IPO as early as February, but a final decision was delayed due to the reduced valuation in light of the dismal market conditions. On 29th of September, however, VW finally floated 12.5% of Porsche’s total shares on the FSE at a price set at the top of its valuation range of €76.50 to €82.50 a share, which valued the company at €75.2bn. The IPO was the biggest in Europe for over a decade and raised around €9 billion for VW, providing them with funding they have indicated will be used to help the company become a world leader in the development of electric vehicles.

Not only did the IPO overcome a bearish market, with Porsche rising almost 3% on a day where the wider German market dropped by an average of 1%, but it also defied the lower valuations given by other banks such as HSBC, who valued the company between €45 - €57 bn. Indeed, at close on 10th of November 2022, Porsche’s (P911) share price sits at €102.05, up around 20% since the IPO, and last month Porsche overtook parent VW as Europe’s most valuable car manufacturer.

Outlook for 2023

Looking ahead to 2023, the increasing geopolitical tensions, rising interest rates and worsening cost of living crises do not signal a flurry of IPO activity. PwC only sees the IPO upturn occurring in late 2023, and even then provided the following conditions are met: a stabilisation of stock markets with stable index fund performance and trading volumes, reduced volatility, increased macroeconomic and geopolitical stability, and evidence of IPOs succeeding in the long-term.

However, there are certain sectors in which deals are more likely to be attractive to investors and we may see significant activity. For example, in industries like technology and green energy. Furthermore, investor appetite may continue to grow in regions such as mainland China and the Middle East as investors look not only to diversify their portfolios to offset the risk of market volatility, but also to take advantage of the emerging opportunities in these regions.

One potential upcoming IPO on the LSE is from the investment company, Conviction Life Sciences. They look to test investor appetite in London and hope to raise £100m. With this capital, they will invest into life sciences and biotech firms which they believe to be undervalued, targeting 20% yearly returns. This IPO, which is planned to take place in December 2022, will likely set the tone for the next year which has already seen many scheduled IPOs pulled due to market conditions.

Conclusions

To conclude, despite Porsche’s heroics, the freefall of the IPO market in 2022 from the highs of 2021 will seemingly continue into 2023, as geopolitical tensions, market volatility, and inflation continue to increase with no clear end in sight. What is clear, however, is that the current market conditions are unfavourable for companies wishing to go public, who face much lower valuations than they would have attracted during the bullish pandemic market. And with these lower valuations, come more attractive price tags for investors or corporations looking to capitalise on the situation, in hope of achieving their goals at a discount.