Despite 2012 being a poor year for equity capital markets, 2013 has started positively and emerging markets are likely to be a rich source of initial public offerings if eurozone jitters remain under control.
The equity capital markets (ECM) business had a poor year in 2012 by any definition. Total offering values worldwide were up 1.5%, thanks to a 15% rise in follow-on offerings, according to Thomson Reuters data. But initial public offerings (IPOs) were down 29%. In China, the hot market for some time, IPOs were down 42% as accounting scandals made US investors think again.
However, a 54% quarter-on-quarter surge in the fourth quarter held out hope for 2013. Even after a rally in equity markets of 15% to 20%, the relative value spread of credit to equity is still stretched following a sustained tightening of credit yields.
“The start of 2013 has very much continued the tone set in the final quarter of 2012. Since [European Central Bank president Mario] Draghi’s speech [promising to defend the euro] in July 2012, Europe has become investable again for US and global funds. Progress has been made around Spain, the perception of redenomination risk has been materially reduced and the market now feels much more resilient to any unforeseen shocks,” says Alasdair Warren, head of European ECM at Goldman Sachs.
Emerging market focus
Emerging markets look to be the major beneficiary, after accounting for 39% of offerings by value in 2012. There have been strong inflows to dedicated emerging markets funds since the start of the year – $14bn in the first fortnight of 2013 – as well as to US mutual funds. “These are the signs that every ECM practitioner has been waiting for. In 2012, there was record bond issuance as demand drove yields to record lows. Now the search for yield is moving into equities,” says Nick Koemtzopoulos, head of emerging market ECM for Europe, Middle East and Africa (EMEA) at Credit Suisse.
The superior economic growth prospects for resource-rich economies and emerging markets, especially in Asia, Latin America and Africa, should continue to attract investors in both primary and secondary markets.
“At the moment, the mandated pipeline is dominated by emerging markets, the UK and Germany. Investors in 2012 were looking for high-quality assets with yield support sold as part of restructuring situations such as [insurance company] Direct Line, companies in growing markets such as Santander in Mexico or [Spanish telecoms provider] Telefonica in Germany, and increasingly those companies that might benefit from a cyclical upturn such as financials and industrials,” says Gareth McCartney, head of EMEA equity syndicate at UBS.
There are signs that the appetite for emerging markets will extend beyond systemic companies sold as part of privatisation programmes in core geographies such as Russia or Poland, to include high-quality off-index assets in more challenged economies. In December 2012, Sweden’s telecoms giant TeliaSonera raised $525m through an IPO of its Kazakh subsidiary KCell, on which Credit Suisse, UBS and Visor Capital acted as joint global coordinators. But it is too early to say if the volatility that shut primary equity markets so often in the first half of 2012 is entirely over.
“Institutional investors can see there are good valuations available in global emerging markets such as Russia, but they also want to see evidence that their ideas of fundamentals will play out in terms of a sustained market direction. At the moment, it still appears as if prices are being driven by volatile sentiment toward the eurozone or US economy,” says Edward Conroy, a portfolio manager at HSBC global investment funds.
Second-quarter boom?
In this context, Mr Warren says there is a good pipeline of issuers waiting to launch IPOs, but they may well wait to see if the positive sentiment endures during the first quarter. If it does, then there could be a marked uptick in ECM activity in the second quarter.
“The IPOs in the second half of 2012 have generally ended the year trading up and outperformed the wider market, which sends a good signal to potential issuers and investors. Rising equity prices will also encourage opportunistic follow-on deals, including sell-downs by sponsor, government and corporate owners. The market is also seeing some of the more highly leveraged companies thinking about rights issues and accelerated bookbuild offerings to strengthen their capital positions,” says Mr Warren.
If momentum continues throughout 2013, then activity may begin to extend into the markets that have been most sluggish. That might include recapitalisation trades from companies most affected by the eurozone periphery crisis, and exits by private equity sponsors, especially in the UK where investors have been wary. Many private equity funds have maturing mandates and need to recycle cash.
“There has been a perception among some investors that financial sponsor assets do not always work so well in the public markets. But there were successful deals last year such as [the $1.1bn IPO of Dutch cable operator] Ziggo that showed sponsor assets can perform well and also highlighted the value of adopting a strategy of a smaller initial offering plus follow-ons into share price strength to enhance liquidity,” says Mr McCartney.
