After this year’s IPO slump, bankers are wary of 2023 relief

A mix of rising inflation and interest rate hikes aimed at taming it has eroded investor appetite for high-growth IPO candidates. PHOTO: EPA-EFE

BEIJING - Initial public offerings (IPOs) are heading for their longest drought since the global financial crisis – and bankers do not expect a revival any time soon. 

A mix of rising inflation and interest rate hikes aimed at taming it has hurt stock market valuations and eroded investor appetite for the high-growth IPO candidates that have driven deals in recent years. Just US$207 billion (S$280 billion) has been raised in 2022 from listings – 68 per cent down from 2021 – as a surge in flotations in China and the Middle East failed to make up for a frozen US market.

“Two things are needed for emerging capital markets activity to resume: stability around inflation and visibility on the trajectory for interest rate hikes,” said Mr Edward Byun, co-head of Asia ex-Japan equity capital markets at Goldman Sachs Group. “Once there is conviction inflation has peaked and clarity on the rate outlook – likely in the second quarter of next year – we will begin to see the market move forward.”

This year’s listings slump is the worst since IPO values tumbled 73 per cent in 2008, according to Bloomberg data. It follows a 2021 boom, when peaking stock markets and a US blank-cheque listing craze led to an unprecedented US$655 billion IPO haul. Since then, however, high-growth tech companies without a path to profitability have lost favour while consumer firms are finding investor support lacking as inflation surges.

It does not help that so many of last year’s IPO stars are under water. On average, the crop of 2021 US market debutantes are down 19 per cent since going public – among them once highly sought-after electric vehicle start-up Rivian Automotive, which is down almost 70 per cent.

The United States IPO market has been one of the biggest drags, hit by a collapse in the blank-cheque deals that were behind 2021’s surge. Listing volumes of US$24 billion are the lowest since 1990 and down 93 per cent from 2021, with bankers saying that investors will favour stable companies flotations in 2023. 

The two markets that did well in 2022 – China and the Middle East – are likely to continue to do so, say bankers, even though the Asian nation is seeing a surge in infections as it drops its Covid-19 curbs and falling oil prices are dragging down Gulf countries’ stock markets.

“Given the Chinese government is loosening regulations on the property sector and we are seeing a clear trend of loosening Covid constraints, we are expecting a market rebound,” said Ms Mandy Zhu, head of China, global banking at UBS Group. “We are already seeing increased activities for both onshore and offshore markets.”

Companies in mainland China defied the ongoing property crisis and the country’s zero-Covid stance, raising a record US$92 billion from IPOs in 2022, while those in the Middle East have fetched almost US$23 billion. 

Cash calls from companies seeking to shore up their balance sheets have been an outlier in an otherwise gloomy year globally for equity capital markets bankers and will continue to thrive as debt becomes more expensive and economies slow. Almost US$716 billion of rights issues were launched in 2022, just short of 2021’s record US$759 billion.

Still, with the Fed dashing hopes this week of a dovish tilt, few expect a quick IPO revival. 

“We expect to see a slow normalisation of the IPO market next year. There isn’t a clear path into distress or growth issuance yet, and investor demand will be selective in each product,” said Mr Gareth McCartney, global co-head of equity capital markets at UBS. 

The US will likely be the first to recover and there are early signs of a rebound there with increased block-trade activity, he added. Among IPOs that investors are watching for this year: Fortnite owner Epic Games, delivery giant Instacart, and sports apparel retailer Fanatics.

Europe will follow after that, Mr McCartney said, although Asia’s recovery will be predicated on China’s reopening rather than inflation’s direction.

“We expect listings next year to come through in dribs and drabs, conceivably as soon as in the first quarter, but the IPO market will only be open to a few sectors,” said Mr Andreas Bernstorff, who heads equity capital markets at BNP Paribas. “Cyclical and value sectors are likely to be in demand, with energy transition and climate tech companies in particular well positioned to attract strong demand.”

China is expected to see a host of deals in 2023, while in the Middle East, Abu Dhabi National Oil has chosen banks to lead the IPO of its natural gas business next year in what could be one of the city’s biggest flotations. In London, bankers and regulators are working hard to keep home-grown tech companies local, especially as SoftBank Group has decided to list British chip designer Arm in New York.

With so many deals postponed or scrapped, the IPO pipeline is growing longer. Companies that have put off their flotations in 2022 include the multibillion-dollar renewables arm of Italy’s Eni and ABB, which raised some money privately for the delayed US$750 million float in June of its electric-vehicle charging business. 

In the US, VinFast, an electric carmaker backed by Vietnam’s richest man, filed for an IPO that could raise at least US$1 billion, hoping to tap demand for clean energy stocks, while India’s most valuable start-up, online-education giant Byju’s, is finalising plans for a US$1 billion listing of its tutoring business Aakash Educational Services, people familiar with the matter said. BLOOMBERG

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