2023 IPO FORECAST
Robin Walker, Director of Business Development at EQ, considers how the key influential trends will affect the market.
By all measures, 2022 was a year to forget for the global IPO market.
Volatile markets, a dour economic outlook, war in Ukraine and rising interest rates forced many would-be public companies to adopt a ‘wait and see’ approach last year.
In a typical year we might see some markets outperform while others lag their rivals. However, activity was down significantly across the board last year, even if Asia-Pacific did fare slightly better than the US and Europe. According to EY, the number of global IPO deals slumped 45% last year to 1,333, with firms raising just $179.5 billion, a 61% decrease on the year before.
So, should we expect a recovery for the global IPO market in 2023?
It’s always difficult to predict the future, but the consensus view is that 2023 has the potential to be a brighter year for the global IPO market than 2022.
While the headwinds the global economy faced in 2022 remain, the outlook is far less bleak than a couple of months ago.
With that in mind, we outline three emerging trends we could see in the IPO market during the course of the next 12 months.
A London recovery – but probably not until the second half of the year
While most major IPO centres struggled in 2022, London’s underperformance stood out in particular.
In 2021, London was the largest centre for IPOs globally outside the US and China, two much larger markets.
However, last year only 45 issuers listed in London, down from 120 in 2021, raising just £1.6 billion total, down from £16.3 billion the year before, according to EY.
While the slump in activity is clearly concerning, there is a quiet optimism that 2023 will be a much better year for London than last year was.
One of the reasons for that is that policymakers are intent on revamping London’s listing regime to attract the sort of innovative firms that drive growth.
At the same time, chancellor Jeremy Hunt is on record stating his desire to create a tax regime for businesses that is more encouraging of growth.
The economic outlook has also improved. While experts still believe the UK will fall into recession, the contraction is expected to be shallower and shorter than once feared.
And whereas economists once forecast interest rates peaking at more than 6%, now they think the benchmark borrowing rate will max out at around 5%.
There are similarly optimistic forecasts around inflation, which prime minister Rishi Sunak has pledged to halve before the end of the year.
Should all these factors come to pass, it would make for a more welcoming environment for firms considering a London listing.
Regardless, though, we expect it will not be until the second half of the year before any noticeable uptick in activity.
A greater focus on company financials
For much of the past decade, investors have been willing to back companies at IPO that are loss-making, but which have the potential to produce ‘jam tomorrow’.
However, that was in an environment where interest rates were stable and much lower, and where central banks had flooded the market with liquidity.
Now, though, conditions are hugely different indeed.
Across the globe central banks have sought to tighten monetary policy in order to tackle runaway inflation, which has led to much higher interest rates.
As a result, we are starting to see investor preferences shift in favour of profitable firms with stable cashflows.
That is not to say loss-making growth firms will not continue to make for popular investments. But they will need to have a convincing path to profitability to warrant backing that potential.
Therefore, expect to see greater scrutiny of company financials over the course of the next 12 months.
Caution over bank IPOs
The past few weeks have not been great for the banking sector, with Silicon Valley Bank, Signature Bank and Credit Suisse all needing rescuing.
While commentators tend to agree that a full-blown financial crisis can be averted, investors will be naturally wary.
Questions will be asked whether or not the banking sector needs to be more tightly regulated or whether there is a risk of contagion, like there was following the 2008 financial crisis.
Thus, we expect the flow of banking IPOs to slow and those that manage to make it over the line to come under much greater examination by investors.
More realistic valuations
Low interest rates and unprecedented money printing by central bank banks caused the longest bull-run in history in the 2010s. They also created the perfect conditions for valuations to reach new highs.
However, the bear market that has hung over markets since the start of last year has made investors less willing to pay blockbuster valuations for growth tomorrow. And over the past year, we have seen billions shaved off the valuations of big-name start-ups such as Stripe and Klarna.
That is a trend that may well continue for most of 2023 – and beyond – or at least until central banks stop hiking interest rates and economic conditions become more benign.
Robin Walker is an IPO expert and Director of Business Development at Equiniti
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