In a year of upsets IPO market had a rough ride
The number and scale of floats was down sharply in 2016, but 2017 looks much more promising
TI Fluid Systems, which started life supplying fuel lines to the Model T Ford, pulled its float, picture BETTMANN
From the deaths of David Bowie, Alan Rickman and George Michael to terrorist attacks and the rise of the alt-Right, 2016 has for many people, been a year to remember for all the wrong reasons. In fact, it has been so bad that some are jokingly using the number 2016 as a pejorative adjective to describe something awful.
And, unfortunately, when it came to floating on the London markets, it has been, well, just a bit 2016. Only 63 companies listed on the London Stock Exchange this year, 26 of which were on the main market and the rest on the Alternative Investment Market.
This is down on the 90 companies that listed last year and considerably fewer than 137 IPOs that took place in 2014. Close to £5.5 billion was raised through listings this year which was significantly down on last year’s figure of £13.2 billion and some way off the £16.8 billion in 2014.
The performance of London’s markets was characterised by a few good floats, a smattering of poor performers as well as a number of stalled IPOs, some of which never even made it to pricing as demand was so volatile. PwC said that IPO proceeds were down about 60 per cent in London with volumes falling by a third because of Brexit and other geopolitical shocks. The picture across Europe was equally mixed with Thomson Reuters reporting that close to $33 billion was raised in the continent’s IPO markets this year, less than half of last year’s $69 billion.
London’s haul could have been even lower had it not been for Convatec, the medical devices maker which floated in the final quarter, raising about £1.4 billion in the largest listing of the year. The company was the only one of about five or six companies in the final quarter that managed to get its float away within its originally stated price range, albeit at the lower end. Others, such as Biffa, the waste management company, were forced to slash their offer price, and Misys, the banking software services group, and TI Fluid Systems, a maker of car parts which won its first contract, in 1922, to supply fuel lines on the Model T Ford, pulled their IPOs altogether in a volatile end to the year.
Across the continent, more than 30 IPOs were scrapped or delayed during a year in which Britain voted to quit the European Union, Donald Trump was elected president of the United States, and the Italian prime minister Matteo Renzi resigned after a vote on constitutional reform. Next year’s market conditions could be equally uncertain as elections in France and Germany and a potentially “hard Brexit” threaten to destabilise confidence further.
Richard Cormack, co-head of equity capital markets at Goldman Sachs, said that IPO volumes in Europe, the Middle East and Africa were down partly because 2014 and 2015 had been “really strong years”, but also because of the difficulties navigating political events. “The windows [for getting IPOs done] were more distinct this year. [Going into the final quarter] it felt like there was a robust pipeline with a lot of institutions looking keen to engage but the actual market turned out to be more challenging,” he explained.
“The IPO market tends to feed off its own momentum and some deals came out and traded well but others did not and that did impact the tone of the market. Brexit also became much more of a focus of debate again after the Tory party conference and then we had a number of floats that either didn’t make it to pricing or had to be restructured.”
One float that dampened investor sentiment was the mega float of Nets, a Scandinavian payments processing group, which listed on the Danish stock exchange in what was then the biggest European listing after Britain’s Brexit vote. While the Nets IPO was heavily oversubscribed — market rumour has it that there was such high demand that 11 big “long only” investors could have covered the book on their own — it did not perform well after the float. Shares in Nets have not closed above their 150 kroner price since the float and analysts believe the company was overvalued.
Volumes were also down this year as there were fewer private equity groups selling down their interests in companies, a key trend in the IPO markets in 2014 and 2015. One banker said that the top six investment banks in London were dealing with only about half the volumes of private equity-led IPOs as before and said: “The private equity groups have been raising funds like there is no tomorrow and they are now sitting on at least $400 billion of dry powder as they have been selling and floating businesses, so now they are looking to buy.”
While 2016 has been poor in the equities markets it has not been all doom and gloom. According to the London Stock Exchange most of the companies that have listed this year performed very well since, with 80 per cent trading up with an average weighted price performance of 19 per cent. London’s junior market has also bucked the trend with 37 IPOs, up from 30 last year.
Blue Prism Group, the software company that listed on AIM in March was the best performer of the year with its shares rising 438.5 per cent since it floated. In fact, the top three performing floats were all AIM-listed companies. Franchise Brands and MaxCyte, a life-sciences business, recorded a 101.5 per cent and 93.6 per cent increase in their share prices since listing. The worst performers included Bluebird Merchant Ventures, a Philippines gold miner, and CMC Markets, the spread betting group hit by a City watchdog crackdown. Their shares fell by 66.7 per cent and 54.7 per cent respectively.
Nick Fowler, managing director of equity capital markets advisory at Lazard, said that the markets had been more robust than expected. “The markets’ resilience to political shocks this year provides some encouragement as well toward another year with a significant number of macro political events,” he said. “We think these events will create a window-driven market, and it will be very busy during those windows with a number of large, high-profile businesses in the European IPO pipeline for 2017.”
Institutional investors are likely to be more discerning about which flotations to back next year after weathering a torrid 2016 where there were giant swings in the market. Experts believe that yield-based investments will be less popular than in previous years with investors looking for companies that can offer growth and earnings.
Within the broader capital markets in the UK and Europe, Middle East and Africa, it is likely that there will be still be a focus on banks and financial institutions, including potential capital raises in Europe. Ed Sankey, co-head of Emea equity capital markets at Deutsche Bank, said: “The IPO pipeline for next year is looking robust and we expect volumes to be up, having fallen this year relative to the active 2015. The potential for a continuation of the rotation [out of bonds] we have seen into equities will be a positive for the capital markets pipeline.”
Chris Nicholls, head of IPO and equity advisory at Deloitte, said that there would be demand for companies with a “compelling equity story and valuation metrics”. “In particular, energy and resources companies are due to make a return as commodity prices appear to be stabilising,” he said. “Our own pipeline contains companies from the financial services, TMT and consumer sectors.”
There are already some big companies limbering up for floats. Brait, the South African vehicle which owns Virgin Active and most of New Look, the fashion chain, has appointed Goldman Sachs and JP Morgan as joint sponsor ahead of a listing in London that could be accompanied by a capital raise. The group, whose name refers to an uncut diamond, already trades its shares on the Johannesburg and Luxembourg exchanges but wants a listing on a top global exchange.
Ireland’s department of finance is also preparing to float a stake of about 25 per cent in Allied Irish Bank in both London and Dublin in what could be one of the largest IPOs in the region.
In another possible sign that 2017 will be a bit less “2016”, bankers are reporting that companies have increasingly started to sound then out about possible floats during the past few weeks with predictions that there could be a few IPOs of “£1 billion plus in size” next year.
One banker said: “There will be more coming out of family owned businesses, such as subsidiary IPOs. I think 2017 will also be a giant year in terms of global IPOs as you have Snapchat, Uber, Airbnb potentially coming to the market, but these will be in the US or Asia, not London.”
Author Deirdre Hipwell
Retail editor and Mergers & acquisitions editor at The Time