London’s dismal capital markets performance is back in discussion after Ernst & Young's Tuesday report reminded us that just five IPOs occurred in the first quarter, with the lion’s share of three going to the junior AIM market and just two admitted to the main market.
A paltry £81mln was raised from all five, with the largest listing being the £60mln Dar Global plc IPO on the main market. Onward Opportunities Ltd (AIM:ONWD) netted the biggest AIM IPO with a £13mln fundraise.
In comparison, the first quarter of 2022 enjoyed 12 IPOs on main and seven on AIM, raising a combined total of £400mln, still only a fraction of the £5.7bn raised in the first quarter of 2021.
This means that IPO activity this year is down 80% year on year and something like 99% down from the two-year peak.
“The London IPO market continues to experience the extremely challenging conditions witnessed in 2022. There remain strong headwinds including the war in Ukraine, high energy and commodity prices, and wider inflationary pressures,” warned Scott McCubbin, EY’s IPO head for the UK and Ireland.
While London is undoubtedly suffering from a major floatations dip, we should take stock of the global picture.
Headwinds sweeping the City are blowing far and wide- global IPO deal values this quarter fell 61% against London’s 80%; a fair gap to be sure but hardly an ocean of difference.
Asia-Pacific proceeds fell 70% while the average across EMEA was a drop of 36%. Only the Americas saw growth in proceeds of 9%.
New cycle?
”If you believe the IMF’s view that UK rates have peaked and will start to now head down, I think that we will begin to see IPO activity pick up in 2024,” said Neil Shah, director of content and strategy at Edison Group.
The markets appear to be in agreement with the IMF (International Monetary Fund)’s contention that interest rates will soon start heading back towards pre-pandemic levels, bearing in mind towards does not imply a wholesale reversion to zero.
“In the UK, markets think there might still be an extra pump in the tightening cycle in the coming months, but are still forecasting interest rates to fall back in the longer term,” said Laith Khalaf, head of investment analysis at AJ Bell.
Khalaf also reasoned that growth stocks would be first in line to rise inverse to falling interest rates with more distant earnings streams, since “these are precisely the kind of stocks that have sold off most heavily as interest rates have risen, reducing the value of future cash flows”.
Furthermore, institutional investors “might not find they have to pivot too hard back to growth companies” since their portfolio exposure still remains present, albeit reduced.
While the issue of funding – or lack thereof – cannot be ignored, Shah said that “the value of accrued funding is somewhat dubious – what’s key is the institutional investor and flows into equity markets”.
March saw a reversal in flows, with around £1bn moving back into equities, noted Shah. However “with less capital to deploy, UK equity managers are going to be picky about new issues and most will continue to support existing holdings”.
In short, things may still be tight in the year ahead, but the prospect of an up-cycle in 2024 should offer a glimpse of optimism for the Square Mile.