Bumpy public markets weaken appetite for IPO activity

Amounts raised have declined, but markets are more forgiving of postponed deals

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If you give companies a choice between bumpy public markets and friendlier private ownership they are likely to go for the latter, which is why 2015 saw a decline in the amount of money raised from initial public offerings.

Experts say this development, which follows several strong years for IPOs, is likely to continue in 2016 against a backdrop of negative indicators.

Equity markets suffered severe market turmoil at the beginning of the year after sharp falls in China, exacerbated by fears of a global slowdown and perceptions among investors that stock market valuations have been driven too high by loose monetary policy.

Globally, the value of IPOs fell by 36 per cent between 2014 and 2015 from $263.8bn to $193.9bn, according to Dealogic, the data provider, as a number of shocks led companies to stay away or delay deals.

“We’ve had a very good and robust run of IPO activity over the past few years,” says Mark Hantho, global head of equity capital markets at Deutsche Bank, who believes last year’s decline was more of a reduction to a “normalised level”.

As IPOs are a way of discovering the correct price for a company’s equity, bankers traditionally do not like to float when markets are volatile.

A rough guide is that a company should not list when the Chicago Board Options Exchange Volatility Index (Vix), which shows the market expectation of short-term volatility, is above its long term average of 20. On only two days in 2016 has the index been below this level. There was not a single US IPO in January.

Fast-growing tech companies stayed away from equity markets over the past year.

While Facebook floated in 2012, followed by Twitter in 2013 and Alibaba in 2014, newer companies such as Uber, the taxi-hailing app, Airbnb the accommodation app, and Snapchat, the social media platform, all remained in private hands.

In an indication of cooler investor sentiment towards the sector, Square, the San Francisco-based payments company, priced its shares at $9 at its November IPO, a 40 per cent drop from the level paid by investors in a private fundraising a year earlier.

Europe, however, had the busiest first quarter for at least a decade in 2015, according to PwC, after the fall in the oil price and geopolitical uncertainty in 2014 led to a number of deals being delayed. The market was further boosted by some large privatisations.

“We had a very choppy first week last year and we had a series of similar conversations with prospective issuers, but, in the end, January and February [2015] were a great time to come to market,” says Martin Thorneycroft, head of European equity syndicate at Morgan Stanley.

Participants say that after such experiences, the market is more forgiving of IPOs that are postponed.

Now, say market participants, delaying an IPO can give a company more time to build a record of performance and enable investors to become more familiar with it.

So some flotations that were delayed last year may expect a friendly welcome over the coming months thanks to a lessening of the stigma associated with a pulled deal.

In the US, grocery chain Albertsons, department store Neiman Marcus and SoulCycle, a cycling-based fitness group, all pulled IPOs in the last quarter of 2015.

In Europe, in spite of a number of big privatisations, other deals including French music streaming company Deezer, Xella of Germany, which makes building materials, and Shield Therapeutics, a Newcastle pharmaceuticals group, were all postponed.

But now because the negative associations of pulled deals are fading, testing the waters for a public listing as opposed to staying private is becoming less risky for companies looking to raise capital even at times of market volatility.

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