While 2019 may have featured some major initial public offerings, it has also prompted questions about the ongoing viability of the IPO model. Marie Kemplay reports.

Uber IPO

Despite ending with Saudi Aramco’s record-breaking $25.6bn capital raise in December, 2019 was not a blockbuster year for initial public offerings (IPOs) at a global level. A total of 950 IPOs took place, raising $165.6bn: a four-year low by volume and the lowest number of deals within the past five years, according to Dealogic.

Add to this the lacklustre performance of several high-profile tech stocks since their 2019 debuts, as well as the dramatic collapse of much-hyped co-working spaces provider WeWork’s planned IPO in September, and it was a somewhat bumpy year.

Such circumstances have led to questions about the health of the IPO model, particularly given the ready availability of private equity capital and a perception that some companies are opting to stay private. Last year’s jittery geopolitical and economic backdrop hardly helped calm the market.  

US leads the pack

It is, however, important to note that while 2019 was full of challenges, it was far from a washout. A number high-profile transactions came to market and, at a regional level, the US had a strong year. US exchanges hosted IPOs worth $58.4bn, a 15% year-on-year increase, and more than the total raised on exchanges in Asia-Pacific or Europe, the Middle East and Africa (EMEA) collectively. In general, the US economy continues to perform well and its stock markets remain at historic highs.

“We’re in the 42nd quarter of economic expansion, the longest on record,” says Santiago Gilfond, co-head of equity capital markets origination for the Americas at Credit Suisse. “It has been a long cycle and there are questions about how much longer it can keep chugging along, but for now we continue to have a relatively accommodative Fed and companies are performing, which bodes well for more issuance.”

But while confidence may be high in the US, there was a different story elsewhere. North Asia (which includes Japan and China) saw volume fall 23.9% year on year to $34bn, via 246 IPOs in 2019, compared with 315 in 2018. Europe also saw a significant slowdown, with volume raised via European exchanges falling from $41.8bn to $22.2bn via 140 IPOs in 2019, compared with 250 in 2018.

Last year’s unsteady geopolitical environment is likely to have dampened the market. US-China trade tension was a recurring theme and Hong Kong’s civil unrest is likely to have rattled issuers and investors. The number of IPOs on Hong Kong’s stock exchange dropped 40.7% year on year and the amount raised fell by 38.3%. It is worth noting, however, that Hong Kong’s stock exchange still attracted two of 2019’s major listings – Budweiser Brewing Company, Asia-Pacific’s $5bn IPO, and the $12.9bn secondary listing of Alibaba.

Commitment issues

In Europe, political stalemate over Brexit and repeated delays to the UK’s EU departure date created a turbulent backdrop. The number of primary listings initiated in the UK, home to one of the region’s biggest stock exchanges, fell from 63 in 2018 to 30 in 2019.

Given the amount of work involved in an IPO, it is perhaps unsurprising that many firms held back or hit pause due to concerns about market disruption. Amid rumbling geopolitical instability, it proved challenging in some geographies to identify a stable IPO window.

“The full process of preparing for an IPO can take anywhere from three to six months,” says Tom Johnson, head of equity capital markets (ECM), EMEA, at Barclays. “Given the political uncertainty throughout 2019, around Brexit in the UK and other factors on a global level, it is understandable that many firms would be reluctant to commit to what is a very involved process.”

Although 2019’s geopolitical issues have not disappeared, there is hope for a more stable 2020, and a more healthy flow of IPOs. In Europe, there are already some positive signs, according to Carlton Nelson, managing director, investment banking, at Investec. “The outlook is now more bullish and we’ve already kicked off a number of processes and fundraises following a pent-up period of inactivity in 2019,” he says. A recent IPO market assessment from KPMG China, while acknowledging ongoing geopolitical challenges, states: “Optimism surrounds Hong Kong’s IPO activities in the coming year.”

In the US, markets are expected to remain healthy, particularly in the first half of the year, before the presidential election. “We’re very optimistic,” says Jay Heller, head of capital markets at Nasdaq. “Of course, any time you take into account geopolitics or the election, that may have some type of impact, but we’re optimistic that the pipeline will remain robust.”

Investors cautious

Another factor affecting markets in 2019 was concern that a global economic slowdown is approaching. Although some more promising economic signs have since taken the edge off these concerns, there is still caution among some investors who worry that the economy is late in the cycle.

Bankers in Europe in particular have reported a ‘flight to liquidity’ and a diminished appetite for investing outside safe or easily tradable stocks. “The IPO market in 2019 was pretty consistent with it being late in the economic cycle. Investors were being extremely careful,” says Andreas Bernstorff, head of EMEA ECM at BNP Paribas. 

This caution seems to have affected the market for smaller cap companies particularly acutely: volume raised via EMEA IPOs worth up to $1bn in 2019 stood at $8.26bn, compared with $16.69bn in 2018, according to Dealogic. In December 2019, Gareth McCartney, head of EMEA ECM cash at UBS, told a capital markets roundtable event that smaller cap companies, whose stocks are not traded in large volumes, typically need “a core group of anchor investors who are really willing to own the stock and see the story play out”, but that group of investors is currently constrained.

Healthy scrutiny

For companies that did make it to market, an increasingly probing investor base made its presence felt. Last year saw several hotly anticipated IPOs, particularly in the tech space, but some of these companies have since struggled. Perhaps most notable are ride-hailing apps Lyft and Uber, both of which have seen their share prices plunge since listing. At the time of its IPO in May, Uber achieved a market capitalisation of $82.4bn, significantly lower than its reported $100bn target, and an opening share price of $45. By mid-November, that had fallen to $26. Although as of mid-January prices appeared to be recovering, and had reached $37, its market capitalisation had still decreased by 22% since listing. It was a similar story at Lyft, which initially priced at $72 per share, with a market capitalisation of $24.3bn. As of mid-January its shares were trading at about $47 and it had a market capitalisation of $14.26bn.

But these difficulties pale somewhat when compared with the collapse of WeWork’s planned IPO. In August 2019 the co-working office spaces platform, which had last been valued at $47bn in a private funding round earlier in the year, kicked off the process of going public. But following scrutiny from investors, significant questions were raised about its finances and how it could achieve profitability. A month later, WeWork’s CEO stepped down and the company was taken over by its largest investor, SoftBank. At the end of September it delayed its IPO indefinitely and SoftBank valued the company at just $7.8bn.

For many in the industry, rather than reflecting a problematic IPO market, these events show public markets working precisely as they should, with scrutiny from investors leading to a correction in over-valuations.

“Investors started to ask questions about the sustainability of some businesses and business models. We saw private markets go through a correction,” says John Tuttle, vice-chairman and chief commercial officer at the New York Stock Exchange (NYSE).

Douglas Adams, global co-head of ECM at Citi, echoes this view. “To me, that kind of scrutiny is the sign of a healthy market, one where investors are focused on fundamentals,” he says. “We’ve seen investors really focused on the underlying business and the path to profitability. There has been a bifurcation between those businesses where there is a clear business plan in place for achieving that and those where that looks to be further out in the future or uncertain.”

Are IPOs wanted?

However, for businesses currently in the private markets, the possibility of a dramatic drop in valuation or an IPO falling apart under public scrutiny may give pause for thought. In an environment with private equity capital readily available, it is hard to argue the necessity of going public. Equally, while debt markets remain cheap, it is tempting for companies to issue debt rather than sell equity. The costs and effort involved in the IPO process may also put off some firms, alongside the ongoing public scrutiny and work involved in regulatory disclosure.

Nevertheless, bankers believe there is a still a cachet associated with listing publicly that many companies find attractive. Beyond the obvious capital-raising possibilities, employees like having the ability to financially benefit from owning a stake in the business. Additionally, an IPO can raise a company’s profile and introduce greater discipline into its governance.

“At the moment there is cash everywhere, so you have your choice of weapon,” says Eric Arnould, global head of ECM at Natixis. “But companies should really consider what is the wider purpose of an IPO. It gives you the opportunity to sell your story to a large number of investors and to diversify control and risk across many holders.”

Even if companies do still aspire to go public, there is a perception that many are doing it later than in the past. This can create problems when they do come to list if they have focused on growth without paying sufficient attention to long-term profitability, potentially leading to valuations that are out of sync with what public investors are willing to pay.

To avoid a hard landing, some believe companies should be going public sooner rather than later. Mr Tuttle suggests the discipline imposed by public markets can help such issues to be identified and addressed sooner. “Rather than waiting until the seventh or eighth inning to do an IPO, maybe come out in the third or fourth inning instead,” he says.

But John Kolz, co-head of ECM origination for the Americas at Credit Suisse, believes that for some companies it can be beneficial to have more experience first. “Companies that stayed private for longer before an IPO will have done it that way because they thought it was the right thing to do for their business, to have been more mature as a company before listing publicly,” he says.

New ways to market

Among the cohort of ‘mature’ companies, there is growing interest in new ways of going public, with so-called direct listings attracting much attention. Although they are hardly a new phenomenon, the model came to prominence after well-known tech start-ups Spotify and Slack chose to enter the public markets via this route in April 2018 and June 2019, respectively. With a direct listing, companies can begin trading shares on a public exchange, but the method differs from IPOs in a number of ways: no additional capital is raised, pricing is determined by the market rather than defined before a float, and there is no share ‘lock-up period’, so existing shareholders can sell shares immediately after a listing. It is also a cheaper alternative, because investment banks do not underwrite the sale and hence charge less for their involvement.

For privately owned companies that are well-capitalised and already have a broad investor base, this may be an appealing approach. For example, it is rumoured that Airbnb is considering this model for its much-anticipated public listing.

Moves are also under way in the US to expand the direct listings model to enable companies to issue new shares and raise capital as part of one. The US Securities and Exchange Commission is currently weighing up proposals by the NYSE about how this could work.

“We’re excited to expand and evolve direct listings,” says the NYSE’s Mr Tuttle. “We want to provide companies with more pathways to the public markets.”

Regardless of what happens with direct listings, most in the industry agree that the majority of companies will still favour a traditional IPO. Mr Heller of Nasdaq, which is currently working on its own plans around direct listings, says: “We will support a corporation either way, and companies should be asking questions about all possible options.” He adds that he expects “a handful of high-profile names” to go down the direct listings route in 2020. Mr Tuttle expresses a similar view, saying he expects to see a “slight uplift” of “three to five” direct listings in 2020.

Although the option to raise capital via direct listings might broaden its appeal, for most companies, which are not household names and have a more limited investor base, it is unlikely to be the best model. “For giant tech in particular I think that model is all well and good, but outside a relatively rarefied group of companies it is a different scenario,” says Barclays’ Mr Johnson.

The good news for issuers is that there is a growing number of options, and banks recognise that they need to be open to discussing all of them. “There are many ways companies can go public: traditional IPOs, direct listings as well as others such as reverse mergers or using a special-purpose acquisition company,” says Citi’s Mr Adams. “The question is which one is right for a company and its shareholders to achieve their objectives. Our aim is to use all the tools in our toolkit to help clients find the right solution for them.” 


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