IPO activity soared to 91 listings in 2007, raising $8.9 billion. This represents a 28 per cent jump from 71 listings in the prior year, raising $6.9 billion.
Despite being in the midst of the US-led sub-prime credit crisis, close to a quarter of the 2007 listings (23 IPOs) occurred in the month of December – the highest monthly activity in 7 years!
This analysis is part of PricewaterhouseCoopers’ 16th Annual Survey of Sharemarket Floats report released today. The report charts the performance of IPOs in the year to 31 December 2007 (excluding compliance listings, ‘backdoor’ listings, demutualisations and resource sector floats).
PricewaterhouseCoopers Corporate Finance partner Greg Keys said, “It is clear now that financial institutions were not adequately pricing risk and debt covenants were often too light and / or effectively non-existent”.
Consequently, aggressive IPO pricing was a feature of the year as evidenced by the majority of 2007 floats (53 per cent) trading at a discount to their issue price as at 31 December 2007. Also, increased market volatility in the last four months of the year and in January / February 2008 has invariably impacted the listing plans for a number of companies.
According to Mr Keys, “2007 saw the listing of seven private equity backed companies, with all but one of these listing prior to the capital market turbulence which began in August”. Boart Longyear was the largest private equity exit in 2007 via an IPO, raising $2.3 billion from investors in April 2007.
“Given the current state of equity markets, we may see more private equity backed companies adopt a ‘dual-track’ exit approach in 2008,” he says.
2008 Outlook
Mr Keys says, “No doubt 2008 will be another year to remember. The world will be hoping that the BRIC economies continue on their upwards trajectory to absorb some of the slack embedded in the US economy and to stabilise overall global growth”.
“We expect financial markets will continue to remain volatile in early 2008 as tighter credit conditions continue, and the threat of recession hangs heavy over the US economy. Closer to home there are also inflationary concerns.”
Mr Keys adds, “The level of market volatility will obviously be the key determinant of IPO activity this year. The current sentiment around the Australian equity market is generally one of caution and, not surprisingly, there is a relatively weak pipeline of IPOs in the coming months”.
“Having said this, investor appetite for quality companies remains strong. Burrup Fertiliser is currently on an institutional IPO road show and the Consolidated Media Holdings backed carsales.com.au is expected to list by the second quarter of 2008.”
“The market is also expecting the privatisation of a number of NSW State Government electricity assets. Interestingly, there has not been an IPO privatisation by either the State or Federal Governments for several years, albeit there have been two relatively recent deferrals, namely, Snowy Hydro in 2006 and Medibank Private in 2007,” Mr Keys says.
“We also anticipate heightened levels of activity in the renewable energy sector over the next 12 months, driven by the recent change in Government and renewed focus on ethical and environmentally-responsible governance by Australian companies,” he said.
Small and Large Cap float performance
Of the 91 companies which floated in 2007, the majority (56) had a market capitalisation on listing of less than $100 million. Consistent with previous years, most IPO activity involved relatively small to moderate fund raisings, with 56 per cent of IPOs (51 floats) raising less than $20 million and 40 per cent of IPOs (36 floats) raising $10 million or less.
In 2007, Large Cap floats continued to achieve significant pricing premiums of around 26 per cent over Small Cap floats.
According to Mr Keys, “Large Caps are generally viewed as more established, more diversified, less volatile businesses and therefore of lower risk to investors, all else being equal. These attributes then typically result in higher forward earnings multiples, being the primary basis on which IPOs are sold to investors”.
Post float performance of Small Caps was down in 2007. Over the course of the calendar year, Small Cap floats returned a negative 5 per cent to investors, whilst the S&P/ASX 300 Industrials Index rose by 3.5 per cent. This reflects aggressive pricing of this category of IPOs by vendor shareholders.
This investor outcome is consistent with the fact that forecast P/Es (Year 1) for Small Cap floats rose slightly in 2007 to 10.3 times, as compared with 9.1 times in the previous year. Large Cap forecast P/Es (Year 1) remained unchanged from the prior year at 13 times.
Large Cap floats provided healthy ‘stag’ profits on listing of 20 per cent in 2007, which largely held up over the course of the year, and generated solid share price returns to investors of 17 per cent to 31 December 2007, thereby outperforming the overall market rise of 3.5 per cent for the same period.
Sector performance
The Investment & Financial Services sector was the largest source of IPOs in 2007 (22 floats), being responsible for close to a quarter of total listings. Remarkably, of the five largest floats in 2007 which collectively raised $4.6 billion, four were in Investment & Financial Services. The largest listing in this sector, by market capitalisation, was Platinum Asset Management.
“Favourable changes in superannuation rules attracting increased fund flows and the need to offer broader employee share ownership to attract and retain key staff contributed to the increase in activity in this sector”, says Mr Keys.
“We anticipate these drivers will continue to create a strong level of interest in this sector in 2008”.”
The Industrials sector also featured highly with 16 listings followed by the Health & Biotechnology sector 12 listings. The Health & Biotechnology sector is traditionally a relatively strong source of IPOs year on year.
Media Contact:
Dannielle Hinwood
PricewaterhouseCoopers
Communications
Ph: 02 8266 0636
M: 0418 211 540
dannielle.hinwood@au.pwc.com
The firms of the PricewaterhouseCoopers global network (www.pwc.com) provide industry-focused assurance, tax and advisory services to build public trust and enhance value for clients and their stakeholders. More than 146 000 people in 150 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
"PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
