Mood of caution hangs over IPOs

Going public for the first time is a special occasion for any company, but last year initial public offerings were often tense, even traumatic affairs, with markets marred by a number of shelved share sales and the poor stock performance of those that did go public.

Despite a spluttering but decent start to last year, the implosion of global equity markets in latter months of the year caused the global volume of IPOs to fall 40 per cent in 2011 to $177bn, according to Dealogic.

Bankers, investors and analysts fear the disappointments of last year may well carry on into this year, as the tepid global recovery, fears over the eurozone’s festering debt crisis and concerns that China may still face a hard landing after years of breakneck expansion loom large.

The roll-call of companies hoping to list shares for the first time this year is long and distinguished. One London-based lawyer says the “documentation for them all is piling up around the office”.

The pipeline includes Facebook, Sinochem, Manchester United, Graff Diamonds and Japan Airlines.

Matthew Westerman, global head of equity capital markets at Goldman Sachs, last year’s biggest underwriter of equity deals, says his bank’s backlog of companies hoping to go to markets is at record levels.

“But with markets likely to remain choppy, even a long period of blue skies may not provide a big enough window for all of them,” he says.

Another banker says: “I’ve been doing this for three decades but I’ve never seen markets like this.”

Volatility is the bane of IPOs. Wild swings make shares difficult to price. Although volatility has abated from the highs of last year, it remains elevated, and most bankers expect periodic spikes of instability in 2012.

Adding to the headwinds, many equity funds have less spare cash to invest in new listings due to big outflows. Just in 2011, equity funds tracked by EPFR Global, a data provider, collectively saw investor withdrawals of $160bn.

Europe looks like it will remain the most treacherous IPO market with its rumbling debt crisis. A large part of last year’s $76bn worth of cancelled new listings – a record – were European companies. Société Générale strategists predict that the volume of European IPOs will fall by more than a quarter this year, to an anaemic €20bn.

“There are a few companies looking to IPO, but no one wants to stick their heads above the parapet quite yet,” says Charlie Foreman, head of equity capital markets advisory at Lazard in London.

Even the prospects for Asia, which accounted for almost half of all flotations last year, have dimmed. Investors are particularly wary of IPOs in Hong Kong given the relatively poor trading performance of many of last year’s deals.

“Things are quiet, and people will be very unwilling to launch deals because they wouldn’t get very good prices,” says Michael Snaith, head of regional sales for CLSA.

The mainland has also seen some enthusiasm for IPOs wane. Fortune SG, a Société Générale Chinese venture, has said it would stay away from mainland IPOs because of the difficulty judging their quality. Goldman Sachs has said that it was abstaining from managing IPOs because of the risk of dealing with small companies of unproved quality.

Bankers say the IPO prospects look somewhat brighter in the US, thanks to the respectable performance of some companies that floated last year, particularly in the technology sector. US technology listings saw an average pop of 26 per cent in first-day trading last year, versus 10 per cent for the market globally, according to Dealogic.

The US technology pipeline remains well-stocked, though Facebook, possibly the largest and most exciting listing this year, has not yet formally filed its intentions with regulators. The choppy performance of Groupon and Zynga, which fell sharply after debuting late last year, has spurred many other companies, including online reviews site Yelp, to hold off until a stretch of smoother markets, probably in the second quarter.

Thierry Olive, global head of equity markets at BNP Paribas, predicts that IPO markets will reopen this year, but slowly and gingerly.

“There is such a huge pipeline that investors can afford to be picky,” he says.

“Only the best names will go to start with, and only those that are willing to accept lower valuations.”