Global IPO markets were caught in the doldrums of inflation, slowing global growth, war in Ukraine and resultant equity market sell-off this quarter. As market conditions deteriorated, global IPO market sentiment remained very fragile in Q2 with volumes significantly down quarter on quarter and, in particular, compared to last year. Q2 2022 global IPO issuance totalled $36.6bn, over 70% down compared to Q2 2021 issuance and even lower than Q2 2020 issuance of $43.6bn at the start of Covid-19 pandemic, the lowest second quarter since 2016. This quarter has also seen a number of transactions being canceled or postponed as investors continued to test valuations. With the backdrop of high volatility and challenging IPO market conditions, the pre-marketing period for IPOs in Europe has started to lengthen as investors needed more time to get on board and cornerstone investor support also helped to get some deals over the line.
Following a five-year low for IPOs in Q1, the US IPO market in Q2 was pretty much closed in Q2 with only eight traditional IPOs. The European IPO market was also largely closed with only €2.1bn of issuance in Q2. The only two regions with meaningful IPO activity were China and the Middle East (together 64% of Q2 2022 IPO proceeds), which remained active fuelled by the STAR and ChiNext markets (China's rival tech platforms in Shanghai and Shenzhen) and an ongoing privatisation drive respectively.
Following a difficult first quarter, Q2 brought further uncertainty with rising interest rates, soaring inflation and slowing growth, exacerbated by the war in Ukraine and lockdowns in China.
Whilst equity markets have also taken a hit with major indices nearly erasing their last year’s gains in the first half of 2022, with S&P 500 down 21%, Stoxx 600 down 17% and MSCI World down 21%, many market participants see this as a necessary valuation reset.
Notwithstanding a 59% ($17bn) decline in proceeds from Q1, EMEA IPO proceeds were comparable to previous second quarters. Strong issuance in the UAE contributed a significant proportion (72%) of EMEA total proceeds.
The main European exchanges and the UK saw limited IPO activity this quarter. An exception was Italy, with a global chemicals company raising $0.5bn.
The privatisation of state-owned enterprises continued in Q2.
An Abu Dhabi based Polyolefins manufacturer raised $2.0bn; and
Dubai’s state owned electricity & water Authority raised $6.1bn.
As a point of reference, there were no IPOs in the UAE in 2018 or 2019, one in 2020 and three in 2021 ($2.6bn raised).
Two notable IPOs in Q2:
$2.7bn raised by an Indian state-owned insurance group and investment company, India’s largest ever IPO; and
$0.7bn was raised by a logistics and supply chain business.
72 IPOs raised $14.1bn in the quarter.
Since 2019, IPOs on China’s STAR Market and ChiNext have accounted for on average 71% of total annual proceeds for all China exchanges.
So far this year, 89% of proceeds raised on China exchanges were on the STAR Market and ChiNext.
The markets are focused on science and technology companies, seeking to attract home-grown companies to list in China and Hong Kong rather than Nasdaq in the US.
The decline in US SPAC IPOs continued this quarter. Q2 2022 was the lowest quarter in terms of proceeds since this IPO structure became popular in early 2020 with 17 SPAC IPOs raising $2.2bn.
The SPAC market in the US is facing challenges as expiration dates from the 2020 vintages approach and redemptions remain at record levels. This is compounded by the backdrop of proposed new SEC regulations that will increase regulatory hurdles and liability of banks and other advisers/promoters of SPACs.
Investors are also losing interest in SPAC IPOs as the private company merger market is extremely competitive now. Given recent difficulties in SPAC mergers and post-merger stock price performance, SPAC investors are hesitant to consummate mergers, which contributes to increased SPAC redemption rates. 2022 has produced c.50 US de-SPAC completions across a number of sectors, including “growth areas” such as electric vehicle charging.
With 18- 24-month investment horizons, many SPACs are approaching expiration. The aggregate capital in SPACs that need to be put to work in 2022 and 2023 - or be returned to investors - totals $142bn ($33bn in 2022 and $109bn in 2023).
Whilst inflation remains the biggest risk to equities, combined with slowing global growth, the risk of stagflation may alter investors’ risk appetite and sector positioning leading to a favoring of defensive stocks and sectors that have a positive correlation with inflationary pressures. One of the consequences of the war in Ukraine could also be an acceleration of the pace of clean energy transition and a move away from fossil fuel dependencies driving activity in the renewables sectors.
Market participants are also watching closely the Federal Reserve and the path of the rate hike in the US, particularly in light of growing recession expectations and weaker than expected Purchasing Managers’ Index (PMI) numbers. A recent bounce in the US equities suggests that investors are starting to price in no further rate increase from the Federal Reserve beyond 2022. Volatility that remained elevated throughout the quarter, will also need to drop closer to 20 for the IPO market to reopen.
Heading into the summer holidays season, the IPO markets will likely remain quiet until volatility moderates and the valuation “gap” between the views of investors and issuers narrows. Whilst we continue to see companies preparing to go public and there will be some limited attempts to tap the market in H2 2022, it is expected that the broader pipeline will realistically be pushed back into 2023.
Reflecting on the previous IPO market downturns of the dot-com bubble, credit crunch and more recently Covid-19, it is difficult to predict when IPO markets in the US and Europe might rebound. It would be wise to assume that any reopening will be patchy and hesitant (and at lower valuations). Companies that have IPO on their immediate corporate agenda and might target 2023 would be advised to continue to prepare for an IPO in order to be ready to hit the window when it does open.