There was a surge of initial public offerings on the London Stock Exchange and AIM in 2021, with 123 companies going public. However, this flood became more of a drought last year, as adverse macro conditions and a sense of investor fatigue all but closed IPO markets in the UK and globally, according to KPMG’s head of UK capital Svetlana Marriot.
Historically, the IPO market has tended to hit the buffers following financial crises, data in the NSCI Indices annual review shows. In 2009, only 15 companies listed on AIM, with five debuting on the main market, the fewest since 1987. Though there was a pickup in activity in the years that followed, compared to the pre-2008 period public offerings have remained comparatively subdued.
Only 47 companies listed in 2022, with KPMG reporting a 93% reduction in funds raised, plummeting to just £1bn from £14.3bn the year before. The global market followed in a similar vein, if not quite to the same extent, with IPO volumes dropping by 45% since 2021, according to data from Emerson Young.
It is well-documented that floating in a volatile market can be a risky undertaking, and a strong initial investment at IPO does not remove the possibility of failure. Dowgate Wealth CEO Mark Chadwick highlights the case of Made.com, which floated in June 2021 with a market cap of £775m. It went into administration in 2022, putting a considerable dent in confidence.
The largest and most high-profile IPO of 2022, Ithaca Energy, which Chadwick says floated at the bottom of the range with a market cap of £2.45bn, is currently down 17% from its 250p float price.
Ultimate arbiter of returns
Falling valuations also plagued the class of 2021, with AJ Bell’s Russ Mould pointing out that the Renaissance US IPO ETF, which tracks the performance of a basket of the most recent market floats stateside, has lost almost half of its value in the past 12 months, and almost two-thirds since its autumn 2021 peak.
He adds: “Meanwhile the Renaissance International IPO ETF is down by around a quarter over the past year, and it has halved from its early 2021 high.”
There has been no shortage of global shockwaves in recent years, with the pandemic, war in Ukraine, spiralling inflation, and threat of recession just a few of the issues weighing on company results. However, Mould also suggests that it could be a valuation problem.
“If the investor likes the look of what they see, and feels the stock is coming at a sensible price, then the equity may be worth buying – and it is this final point which is often forgotten. Valuation is the ultimate arbiter of investment return and even a really ‘good’ company can be a ‘poor’ investment if the investor overpays to access is revenues, profit and cash flow streams.
“It was not for nothing that legendary US investor Peter Lynch once noted that IPO did not stand for ‘Initial Public Offering’ but rather ‘It’s Probably Overpriced’.
“Ultimately, IPOs are less of a known quantity as they don’t have the track record that their quoted peers have, in terms of operational performance, financial performance and governance. That’s why they should really come at a discount to their quoted peers, and if they prove themselves then they can trade at parity or even a premium rating.
“This logic has been largely neglected in the last two-to-three years and many new market entrants, especially in the US, have been loss-making, which makes the issue of valuation all the trickier, not that you would have guessed it from looking at some of the market caps afforded these early-stage, jam-tomorrow stocks.”
The examples set by Deliveroo and Spotify are cases in point. Deliveroo floated in April 2021 and saw its share price fall by 17% in the first month of trading, while Spotify’s fell 14% within two weeks of its April 2018 IPO. Despite notable resurgences, the share prices of both companies have plateaued far below their initial valuations.
While debutants may well be ‘probably overpriced’, market conditions and, crucially, investor sentiment are also telling factors in determining their eventual valuations. The managing director of Fundcalibre and Chelsea Financial, Darius McDermott, says in order to go public successfully, a company needs to float in a market that has an appetite for its shares, and one in which the value of those shares can grow.
But 2022 trended down and was subject to considerable volatility. Potential investors are likely to hold off in these market conditions, he says.
10 to watch
Moving into 2023, the situation does not appear to have eased much. While there has been an uptick in investor confidence in the last few months, the current economic outlook is not exactly rosy, especially in the UK. Climbing government debt, an ongoing battle with inflation, and a large trade gap do not point towards an easy period ahead.
Maxim Manturov, head of investment research at Freedom Finance Europe, recently highlighted 10 major companies he believes are planning to go public in 2023, as listed below.
Portfolio Adviser put the list to Glen Anderson and Greg Martin, co-founders of Rainmaker Securities, a firm which operates in the secondary market for shares of late-stage private equity issuers. Their thoughts regarding each prospective IPO are as follows:
Late 2023-early 2024 IPO
- – Questions surrounding economics of delivery companies have hurt its prospects.
- – Liquidity pressures could push them to go public by the end of 2023.
- – Fintech valuation declines and slower-than-expected growth in 2022 have reduced its value.
- – Still very well positioned to be payment infrastructure goliath for ecommerce, which should garner tremendous future value.
- – Expected to begin IPO process when market re-opens, either late 2023 or early 2024.
- – Great company addressing a huge market with a superior team and technology for AI and big data.
- – Lots of cash, so no pressure to go public, other than for liquidity purposes.
- – Expected to wait until market conditions are ripe and go public in a stronger market.
Late 2024-early 2025
- – Slowing growth and challenges in fintech multiples, but well-capitalised and well positioned to be the leading digital bank.
- – May take some time to grow into its last valuation, which will push off its IPO prospects until late 2024.
- – Expect a closer focus on profitability in 2023, setting up for a late 2024 or early 2025 IPO.
- – Difficult to call.
- – Very high valuation relative to revenues, but strong market position.
- – In a market that is much more metric driven, Discord will have to wait longer to go public as it waits for its revenue model to mature.
- – 2025 IPO more likely, or possibly an acquisition.
On the back burner
- – Last round valuation of $10bn (£8bn), but their comp set is trading at valuations that would peg their valuations in the low single digit $bns, a far cry from the $15bn (£12bn) price talk they had when they filed.
- – Resisted going public for 20 years and expected to wait until their revenues increase substantially to justify the $10bn (£8bn) plus valuation.
- – Implausible that they will go public any time soon.
- – Similar story to other fintechs.
- – Despite very high valuations in the private markets, still light on revenues and will be challenged to get anywhere close to its last round valuation.
- – Solid company, but IPO not expected for a few years
- – Overvalued as the market fell in love with plant-based alternatives to meat, riding the wave set by Beyond Meat.
- – Despite healthy growth in is business, more rational market valuations applied to Beyond Meat are crushing Impossible’s valuation and substantially delaying its IPO prospects.
- – Rode the low-rate mortgage refinance boom to spectacular growth and profitability.
- – But rapidly increasing rates have destroyed the mortgage refinance market and are crushing to a business like Better.
- – Do not expect any IPO any time soon.
A notable absence from the breakdown above is Klarna, a fintech held by the likes of Chrysalis Investments. It suffered a staggering 86% write-down last summer, but no comments were provided about the chances of it going public.
Looking out for brighter days
Clearly though, the pair does not expect any to float until at least the latter stages of this year. Even Stripe and Databricks, which are fundamentally strong businesses, are opting to delay. With liquidity issues likely to push Instacart into an early IPO, the other seven are expected to delay until at least 2024, if not later.
Interactive Investor’s head of equity strategy, Lee Wild, agrees with their logic, as he argues that there is little sign of the IPO market being different this year to what it was in 2022, at least for the first quarter or two.
“An environment of rising interest rates and the prospects of some degree of recession are not ideal conditions for raising money or attracting interest in private businesses. There is a backlog of companies waiting to list on public markets when conditions are right, but it’s unlikely that will happen until there’s confidence that interest rates have peaked and we’re on the way out of a recession rather than heading into one.”
The global outlook is similarly unfavourable, and the watchword for companies planning to go public in the near future is ‘delay’ in the hope of brighter days ahead.