Global equities struggled in 2022 as markets had to cope with high inflation, tightening of global monetary policies, lockdowns in Mainland China, the war in Ukraine and an energy crisis in Europe - all leading to global recession fears.
Despite a brief rally in the second half of the year, major global indices recorded double digit losses for 2022, including the S&P 500 (down 19%), the Stoxx 600 (down 13%), and the Shanghai index (down 15%). The only exception was the energy and commodity heavy FTSE 100 index that closed up 1% for the year. From a global sector perspective, only the energy sector index delivered positive 2022 performance being up 41% for the year.
Volatility remained elevated throughout the year halting equity issuance activity, including IPOs, outside of Mainland China.
Source: Capital IQ (S&P Global Market Intelligence, LLC) as of 31 December 2022.
2022 global IPO proceeds were down more than 70% compared to 2021. This was largely driven by a significant drop in US IPO activity, with IPO proceeds falling more than 90% compared to last year together with European and UK IPO markets remaining largely closed. The exception being the landmark IPO of a luxury automobile manufacturer in Germany, representing around two thirds of the 2022 IPO proceeds in Europe.
2022 saw a rise of the local IPO market issuance with Mainland China taking the number 1 spot, representing 39% of global IPO issuance and the Middle East remaining a bright spot for EMEA as the region delivers on its privatisation strategy. Despite a challenging market backdrop, sizable Mainland China activity was driven by STAR Market and ChiNext, exchanges focused on attracting home-grown science and technology companies, and a wave of home market listings of Chinese mega companies formerly listed on overseas exchanges, such as a mobile telecommunication company and an energy company that delisted from the US and sought primary listings on the Shanghai Stock Exchange.
The heightened volatility (VIX average of 26 for the year versus an average of 20 in 2021) and the decline in indices showed a clear correlation with the decline in IPO and FO issuance.
As we enter 2023, market sentiment is dominated by concerns over inflation, the medicine to control it - the extent and longevity of interest rate actions from central banks, and recessions - how severe and for how long. The optimistic scenario is for evidence of inflation abating, allowing central banks to moderate interest rates and for recessions to be shallow and short lived; market sentiment and an opening of any IPO window in western markets will depend on such a scenario starting to be supported by data or bank action. Clearly a materially more pessimistic scenario will make a material IPO window opening much more challenging.
Market participants, including a backlog of suitable IPO candidates, in the US and Europe are now focused on a potential H2 2023 recovery of the IPO markets, and whilst some issuers may attempt to tap the market earlier in H1, issuers are dedicating their resources early to prepare for “being public”. This mindset is the key ingredient to a successful IPO as the markets re-evaluate fundamentals.
Global follow-on issuance, which was also at reduced levels last year, will start to return when market uncertainty and volatility improves and discounts narrow. Opportunistic equity issuance could be expected once the macro backdrop stabilises. With the higher cost of debt, convertible and structured equity issuance is expected to gain further momentum.
Whilst market uncertainty and recession concerns weigh on investors minds, any appetite for IPOs will be driven by companies with a proven track record of growth and profitability, supported by a clear ESG story, strong balance sheet, stable cash flows and the potential to pay dividends. Companies that are likely to be positively placed for IPO success in 2023 will be those that can demonstrate profitability or at least a clear path to profitability.
Privately held company valuations will also need some adjustment to align with public market valuations to reflect the focus on fundamentals. Sectors such as defensives, pharma and companies with a clear link to the environmental agenda, such as renewables and “clean tech”, are also likely to be at the front of the queue for IPOs in the US and Europe when volatility stabilities and investor confidence returns.
SPAC IPO activity reverted back to pre 2020 levels in 2022; 147 SPACs raised $17bn globally, a significant reduction from the peak of 2021 where 676 SPACs raised $172bn.
In the US there were 182 de-SPAC announcements in 2022, of which 101 completed. With a typical investment period of 24 months, the boom in SPAC IPOs seen in 2020 and 2021 has resulted in more than $75bn of funds held in US SPACs with an investment date expiring in 2023 (excluding extension periods). New SPAC issuance is likely to continue to dwindle downwards with a many existing SPACs facing an uphill battle to close mergers before their maturity.
As the traditional IPO market slowly re-opens, issuers may continue to explore other routes to market including de-SPACs, however, it is likely that a number of SPACs will be unable to identify suitable targets to complete a transaction. Even if a suitable target can be found, the challenging deal conditions (high volume of redemptions and challenging PIPE and debt markets) as well as increased regulatory scrutiny from the SEC, present significant hurdles to deal completion.
SPACs remain a niche solution in the right circumstances, for example spin-offs or a sufficiently developed growth businesses with a cash injection requirement. We expect a large proportion of SPACs will however have to return funds to shareholders without a deal.
South Korea and Germany secured their positions in the top five territories driven by sizable IPOs, including global battery cell manufacturer ($11bn - South Korea) and the demerger of the luxury automobile manufacturer ($9bn - Germany). Looking ahead to 2023 and beyond, we expect to see further IPO activity in sectors aligned with the energy transition agenda and more corporate demergers / spin-offs as corporates seek to realise value and refocus on strategic evolution of their businesses.
With the exception of the IPO of the luxury automobile manufacturer in Germany, there was muted IPO activity across other European exchanges resulting in a noticeable absence of European representation in the global IPO league tables.
The Computers & Electronics sector accounted for 23% ($40bn) of global proceeds in 2022, with the majority (73%) of IPOs in this sector taking place in Mainland China. The sector remained in first place and with a similar proportion of global IPO proceeds as 2020 (23%) and 2021 (25%) reflecting the volume of IPOs on the STAR Market and ChiNext which more than offset the declining sentiment towards tech and growth stocks in developed markets of the US and Europe.
Auto/Truck was the second largest sector in 2022 in terms of global IPO proceeds representing 13% ($23bn) of all proceeds, driven by the aforementioned IPOs of global battery cell manufacturer in South Korea and luxury automobile manufacturer in Germany.
The Finance sector also accounted for 13% of global proceeds, albeit the majority being attributable to SPAC IPOs ($17bn / 77%).
Other notable sectors include Healthcare ($15bn) and Utility & Energy ($11bn):
Healthcare - $10bn from 45 IPOs in Mainland China.
Utility & Energy - $7bn from 2 IPOs in the UAE.
The US IPO market was virtually closed in 2022 due to higher volatility and falling valuation multiples, especially in the high-growth, high-multiple tech sector. Those factors made it less attractive for prospective companies to price.
There were only 93 traditional US IPOs in 2022, of which only 19 raised >$100m. These were led by the pharma-life sciences, tech and financial services sectors. Excluding one outlier with a very large return, traditional IPO returns were basically flat in 2022. However growth prospects helped drive IPO returns to outperform the S&P loss of 19%.
In a recent development, the SEC approved proposals from the Nasdaq and the NYSE to amend several rules around direct listings, including the elimination of the price range restrictions. The changes also include adding a requirement for issuers to have an underwriter on the transaction, which is likely to provide another effective avenue for companies looking to provide liquidity to investors.
The health of the 2023 market for IPOs and direct listings in the US will be largely dependent on the Fed’s ability to reduce inflation. Even in the event of a mild recession, we are optimistic that the IPO market will be receptive to high-quality, profitable companies — likely backed by proven financial sponsors such as venture capital and private equity.
A flight to quality will likely continue in 2023. IPO investors are placing a heavy emphasis on financial fundamentals and intrinsic valuation, as opposed to market valuations emphasizing high-growth stories. There is a heightened focus on return via margins, operating leverage and cash flow. Companies that are likely to be positively placed for IPO success in 2023 will be those that can demonstrate profitability or at least a clear path to profitability.
‘The IPO market was virtually closed in 2022 due to higher volatility and falling valuation multiples, especially in the high-growth, high-multiple tech sector. Those factors resulted in 2022 being the quietest IPO market in over a decade. As we get more certainty on inflation and the Fed's response to inflation via interest rate hikes, we expect the market to likely open the second half of 2023 for high-quality, profitable companies and companies with a path to profitability, with the wild card for the market being a potential recession versus a soft landing.’
The IPO market in Europe and the UK remained largely closed throughout the year with the exception of the landmark IPO of a luxury automobile manufacturer in Germany, representing about two thirds of the total European IPO proceeds in 2022. However, as the traditional IPO market was not accessible, companies explored other routes to market including de-SPACs, spin-offs and demergers. Some of the notable de-SPAC transactions that completed last year included the $4.3bn equity value business combination of an online sports betting platform and its listing on the Euronext Amsterdam (the largest-ever European de-SPAC transaction), the $1.2bn business combination of a digital entertainment and media platform by a European Fintech company and its listing on the Euronext Amsterdam, and £1.2bn business combination of a streaming platform and its listing on the Euronext Paris.
2022 built on the foundation that the Middle East region has been steadily establishing over the last few years. Much of the activity observed now is a manifestation of the various regional government initiatives such as Saudi Arabia’s Vision 2030 and UAE’s Vision, which led to a number of privatisation of government assets and IPOs of state-owned entities, such as the $6bn IPO of Dubai’s state owned electricity & water authority in April 2022 that was 37 times oversubscribed and the $1bn IPO of Saudi based base oil company in December 2022.
IPOs are better understood in the region now, together with a more developed regulatory environment, increasingly established market practices and experienced community of advisors. In addition to the listing of state-sponsored assets, the region is also seeing an increase in the number of IPOs of private companies such as a Jeddah based medical group and an Abu Dhabi based hospital group raising $1bn and $0.3bn respectively.
‘Large international events such as the Expo 2020 in the UAE and the World Cup in Qatar, along with some mega IPOs such as the $29bn IPO of the world’s largest oil company in 2019, have increased investors’ awareness of the Middle East region’s potential. The sheer volume of transactions has also led to growing liquidity in the region, most notably in Saudi Arabia and the UAE. In December, we witnessed the first ever dual listing across Saudi Arabia’s Tadawul and UAE’s ADX by a MENA region restaurant group that resulted in $2bn of proceeds. I expect the Middle East IPO momentum to continue into 2023 although geopolitical instability in other corners of the world may bring some uncertainty.’
IPOs on the Shanghai and Shenzhen exchanges raised $38bn and $30bn respectively in 2022, together representing the best year in terms of IPO proceeds in the last 10 years.
Mainland China’s STAR Market and ChiNext, exchanges focused on attracting home-grown science and technology companies have continued to see growth into 2022 representing half of all Mainland China IPO proceeds from 116 IPOs.
In 2022, a mobile telecommunication company and an energy company delisted from the NYSE and sought primary listings on the Shanghai Stock Exchange as uncertainties around the potential mandatory delisting of US listed Chinese firms remained in the wake of access limitations to records of public accounting firms based in Mainland China and Hong Kong.
In December 2022, the PCAOB announced it had secured complete access to inspect and investigate public accounting firms headquartered in Mainland China and Hong Kong, an early positive step which temporarily removes the risk of forced delisting of Chinese companies from US stock markets.
Outside of Mainland China, other territories in the Asia-Pacific region accounted for 23% of global IPO proceeds including; South Korea ($13.4bn), Hong Kong SAR ($8.5bn), India ($7.8bn) and Thailand ($3.4bn). The region proved somewhat resilient to geopolitical and macroeconomic developments impacting the US and Europe.
‘Mainland China exchanges lead in the 2022 global IPO activity league table accounting for 39% of global IPO proceeds. Transactions included sizable IPOs of domestic new economy companies and home market listings of Chinese mega companies formerly listed on overseas exchanges. Market activity was propelled by the effects of major structural market oriented initiatives to reform listing approval and the regulatory framework. We expect the growth and significance of the Mainland China capital market will continue as the pace of economic growth will resume as the resumption of business activities and lifting of border restrictions will boost domestic consumption and new investments in growth industries in 2023.’