By Andrew Hart, corporate lawyer in the international law firm Bryan Cave LLP.
Macro-economic factors and global political events have a huge impact on both the appetite for pursuing IPOs and the market reception of those who choose to do so. If investor confidence is undermined by the economic and political landscape then companies seeking investment will have little choice but to pursue alternative ways to raise capital, consequently stalling IPO activity. This scenario played out in the London IPO market in 2015, where the number of IPOs fell from 137 in 2014 to 92 in 2015. The value of proceeds raised also decreased by around 16% in the same period, according to PwC’s ‘IPO Watch 2015’ report. This followed a strong 2014, which was the most successful year for IPOs in Europe since 2007, with 137 IPOs on the LSE raising a total of €19.4 billion, as per PwC’s ‘IPO Watch 2014’ report. With 2016 having so far followed the 2015 trend, this article will analyse the reasons why the IPO market remains flat and consider the outlook for the remainder of the year.
As the second largest global economy, the strength of the Chinese economy has an inevitable impact on the economic health of the rest of the world. China has been a huge success story, achieving significant year on year GDP growth. This boom helped to support the success of many countries and companies both in China and across the world. However, 2015 saw China’s growth slow significantly, with GDP predictions falling below 7% for the first time in many years. In July 2015, it was reported that the total value of Chinese-listed equities had fallen by around $4 trillion. As the economy has contracted companies have struggled, particularly those dependent on high commodity prices. As a result, the Chinese government has taken an interventionist approach; support was increased for sub-sovereign entities, 1,400 companies were allowed to suspend their shares from trading, and IPOs were suspended. This has contributed to decreasing investor confidence and increased volatility in stock markets around the world.
Following the global economic crisis, many western central banks have employed an expansionary monetary policy with consistently low interest rates and quantitative easing programmes. Following the US Federal Reserve’s increase in interest rates in 2015 (for the first time since 2006) many felt this would set the trend for rate rises across the globe, something which has traditionally been thought to be bad for equity markets as investors shift funds to debt to take advantage of the higher rates. However, whilst this may have had some impact on IPOs in the early part of 2015, it cannot be considered to be a major cause of the current malaise in the IPO market.The widely held view for some time now has been that no (or possibly downward) movement in interest rates is the more likely scenario in the short /medium term.
Political uncertainty in the EU
2015 and 2016 have been characterised by political uncertainty which, in turn, causes jitters in financial markets. In Europe, it was reported that the migrant and refugee crisis saw over one million migrants and refugees enter Europe in 2015, which heightened political tensions as the debate on how to deal with this crisis ensued.
A number of significant elections also occurred in 2015 (including the UK general election and regional elections in France). The outcome of these elections were harder to predict than ever, causing increased uncertainty as to how the policies of the next regime will impact on business.
Significant uncertainty has also arisen following the UK government’s announcement of an in-out EU referendum, to be held on 23 June 2016. The specific consequences of a “Brexit” for potential IPO candidates are unknown at this stage, but it is inevitable there will be significant regulatory changes as the vast majority of legislation which applies to listing a company in the UK, and its continuing obligations once listed, are derived from EU law. A leave vote may also mean that the UK would no longer qualify for the EU “passporting” regime, which currently allows an IPO prospectus approved by the UK Financial Conduct Authority to be used for equity offerings in other member states.
Outlook for 2016
So, what is the forecast for the London IPO market in 2016? It has been a slow start even compared to the relatively low figures of 2015, with the volume of IPOs down 33% and IPO value down 47% compared with Q1 2015, according to figures from PwC’s ‘IPO Watch Q1 2016’ report. Until there is more economic and political stability it remains difficult to predict when IPO activity in London will return to anything like the levels seen in 2014.
However, there are signs of improvements in some recent economic indicators (such as job data and commodity prices) and a soft landing for the Chinese economy is now being predicted. In Europe, the ECB has announced an economic stimulus package which is likely to support growth in the longer term. In addition, the AIM market, whilst still relatively low in terms of the number of IPOs, is demonstrating that the demand for shares in quality corporates remains strong (only two of the 15 AIM floats in 2016 have failed to make gains since listing).
Therefore, whilst crystal ball gazing is always hard, a recovery of sorts for the IPO market in the second half of 2016 cannot be ruled out. This is likely to be the case particularly in the event of a remain vote in the UK EU referendum ending uncertainty over the regulatory landscape overnight with still plenty of time left before the end of the year to start and finish an IPO.