After a sharp slowdown in IPO activity in Q1 2022, Q2 saw IPO numbers drop further on most major exchanges worldwide. The primary causes were familiar from the first quarter: high inflation, energy prices and the invasion of Ukraine all contributed to uncertainty and weighed on investor sentiment. At the same time, interest rates have started to rise after a prolonged period at record low levels, and consumer confidence has taken a hit in the face of the cost of living crisis.
Against this macroeconomic backdrop, stock market volatility has risen, and valuations have fallen. London and New York have struggled for new listings in this environment, with exchanges in China and the Middle East providing the brighter spots in the quarter.
With companies waiting for more favourable conditions to pursue their IPOs, we will likely see greater activity ahead. However, the timing of any return to more typical levels of new issues remains uncertain and will depend on how the economic and geopolitical environments develop in the coming months.
How does the volume of IPO deals compare to previous years?
(2018-2021 full years, 2022 YTD)
While Q1 2022 was the slowest start to a year since the global financial crisis, Q2 was slower still, with only a handful of companies coming to market and no IPOs being recorded in June. For the first half as a whole, IPO numbers were down 71% and proceeds were 99% lower than in H1 2021 (source: EY).
Those companies that did get their IPOs away in the second quarter had a strong bias towards sustainability applications and technology.
Octopus Future Generations VCT plc raised an initial £13.3 million in April 2022. The fund describes itself as looking to invest in businesses that “help to build a sustainable planet, empower people or revitalise healthcare”.
First Tin plc raised £20 million in April to develop two tin projects in Germany and Australia. Tin is a vital component in a range of sectors, including electric vehicles, renewable energy, energy storage and semi-conductors. First Tim aims to play a key role in supporting both clean energy and technology developments.
Mineral exploration and development company Kendrick Resources plc raised £3.25 million in May. The company is focused on producing vanadium and nickel, two metals that are needed for energy storage and power generation, as economies continue to transition to renewable energy.
Also in May, EnSilica plc raised £6 million as it was admitted to trading on AIM. EnSilica is a leading designer of application-specific integrated circuits, which are created for specific products rather than for general use.
Three special purpose acquisition companies (SPACs) also joined the London market in the quarter, following the amendment to the Listing Rules in 2021 to make it easier for SPACs to list in London. These were: Ajax Resources, which is looking to acquire projects in the energy and natural resources sectors; Aura Renewable Acquisitions plc, which is targeting the global renewable energy sector supply chain; and Financial Acquisitions Corp, which aims to acquire technology enabled opportunities in insurance or broader financial services.
Activity in London slowed to an almost stand still in the second quarter as the challenges from the macro-economic environment intensified.
The cost of living crisis, invasion of Ukraine, and inflation have all negatively affected markets, leading to many companies prolonging their stay in a holding pattern.
It will be interesting to see how the year's second-half plays out. As I mentioned in the Q1 2022 IPO Review, a strong pipeline is still in place, waiting patiently for that window of opportunity from which to list - when that so-called window opens, however, remains to be seen.
Robin Walker, Business Development Director, UK Shareholder Services
In the US, the percentage declines in IPO numbers and proceeds in Q2 2022 were comparable to those in London. While Nasdaq has seen 49 IPOs year to date (excluding SPACs), raising $3.4 billion, the New York Stock Exchange (NYSE) has seen just six, with total proceeds of $1.4 billion. Nasdaq reported that it had been the venue for seven of the ten largest US IPOs in the first half and 78% of all proceeds raised.
Demand for new listings has been dented by the performance of companies that came to market in 2021, with the majority now trading below their offer prices and their average performance being worse than the broader market. Investors are therefore focused on companies with strong fundamentals, rather than just growth potential.
Bausch & Lomb, which offers a broad portfolio of eye health products, was the largest New York IPO in the quarter and the second largest in the year to date. The issue on the NYSE in May 2022 generated gross proceeds of $630 million. The company had previously targeted a raise of up to $840 million, with the issue price reduced as a consequence of market volatility.
Another healthcare stock, HilleVax Inc, debuted on Nasdaq in May. The company aims to develop and commercialise novel vaccines, with an initial focus on moderate-to-severe acute gastroenteritis caused by norovirus infection. The issue generated proceeds of $230 million.
The energy sector provided two other notable IPOs in the second quarter. In April, Excelerate Energy Inc received net proceeds of $416 million from its IPO on the NYSE. The company says it is “changing the way the world accesses clean, affordable and reliable energy”, through its operations in the liquefied natural gas market.
ProFac Holding Corp’s IPO on Nasdaq raised net proceeds of just over $300 million in May 2022. The Texas-based company, which was formed in 2016, provides hydraulic fracturing services to the fracking industry.
Right at the end of the quarter, Ivanhoe Electric raised almost $170 million, making it the largest US IPO in June. The business has the rights to large copper projects in the US and was valued at just over $1bn.
IPOs continue to be constrained as investors' appetite for growth remains anaemic. Instead, investors seek to preserve capital-seeking yield in short-term cash and cash-like assets. So far in 2022, the S&P 500 suffered its most challenging first half since Richard Nixon was in the White House. It was a rout for the history books, with the equity gauge down about 21%. Investors in consumer stocks witnessed a wipe-out of $1.8 trillion in market value. That said, the S&P is now simply back where it was in March of last year. With inflation still the top priority, the expectation is that the Federal Reserve will continue to tighten monetary spending, containing efforts by companies to raise capital in the equity markets.
Separately, corporate balance sheets are in good shape, generally speaking. Companies appear to have enough cash to fund operations and return shareholder value through buybacks and dividends. At the end of June, several of the nation's largest banks announced plans to boost dividends.
The corporate bond markets may be an option for companies looking to raise capital. Although increased interest rates mean higher borrowing costs, the appetite for yield makes corporate bonds appealing to investors. For companies needing cash, issuing corporate bonds may help them tap investors seeking yield. The debt of U.S. companies with relatively strong financial profiles is offering investors yield premiums, or spreads, of about 1.31 percentage points greater than what Treasury's offer, according to index data from Bloomberg.
Louis Cordone, SVP of Strategy for EQ + AST
While Asian markets saw fewer IPOs and lower proceeds than in the same period in 2021, the region outperformed in relative terms. Chinese exchanges were the standout performers, with both the Shanghai and Shenzen Stock Exchanges generating higher proceeds in H2 2022 than in H1 2021, up 46% and 51% respectively (source: EY), on the back of fewer but larger listings.
These performances came despite the disruption of stringent COVID-19 lockdowns. The authorities in Shanghai reportedly had officials living in the stock exchange building, so they would not be stuck in quarantine and could continue to sign off new listings.
The Chinese government’s focus on strategically important sectors contributed to the majority of IPOs being on the STAR Market in Shanghai and ChiNext in Shenzen, with their technology focus. That said, the largest IPO in the quarter was CNOOC, China’s biggest offshore oil producer, which listed on the Shanghai Main Board and raised $4.4 billion in the process.
Hong Kong, in contrast, continued to see much lower activity. This market has topped global IPO fundraising in seven of the last 13 years (source: PwC) but proceeds were down 92% in the first half as a whole. Although there had been optimism in 2021 that growing numbers of US-listed Chinese companies would want secondary listings in Hong Kong, this has so far failed to transpire. The worsening economic outlook, COVID-19 and geopolitical instability were all factors in the lack of listings. Hong Kong is heavily reliant on mainland Chinese issuers and policies in China such as zero-COVID have hit sentiment hard among international investors.
In contrast to most of the rest of the world, Middle Eastern stock markets have had a strong start to the year and there are reportedly robust pipelines in Saudi Arabia and the United Arab Emirates that point to 2022 being a record year for IPOs in the region.
There was only one IPO in Dubai in the second quarter but it was a blockbuster, with the Dubai Electricity & Water Authority (DEWA) raising $6.1 billion in April. This made it the region’s largest IPO since Saudi Aramco. DEWA disclosed that total demand for shares was nearly $86 billion, making the issue 37 times oversubscribed excluding cornerstone and strategic investors. As a result, the proportion of shares issued was increased from a planned 6% to 18%, with the government retaining an 82% stake.
The part privatisation is expected to be followed by others in Dubai, with the government having announced its intention to list ten companies. This is part of its plan to reinvigorate the local stock exchange, the Dubai Financial Market, which has been overshadowed in recent years by the exchanges in Saudi Arabia and Abu Dhabi.
Abu Dhabi also saw a notable listing in June 2022, with plastics business Borouge raising $2.0 billion. This is Abu Dhabi’s largest-ever IPO and valued the company at $20 billion, making it the sixth biggest on the exchange. Borouge is a joint venture between Abu Dhabi National Oil Company and Borealis AG, with the latter reporting that the IPO was almost 42 times oversubscribed.
IPO news from India was mixed. The country was the only one to experience a rise in IPO activity so far this year, with deals and proceeds both up by nearly 20%. On the flipside, more than half this year’s listings are now trading below their offer prices.
The quarter included India’s largest-ever IPO, with the government selling a 3.5% stake in Life Insurance Corporation of India and raising $2.7 billion dollars in the process. While the issue was nearly three times oversubscribed and was priced near the top of its range, the amount raised was well below the mooted $6-8 billion for a 5% stake, as suggested by news reports earlier in the year.
Looking ahead, there is reportedly a strong pipeline of new issues, suggesting a positive outlook for the second half.
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