Last year was slowest 12 months for fundraising activity on London’s stock markets since the financial crisis a decade earlier, according to the Financial Times.
Most corporate finance firms and securities lawyers that usually advise on initial public offerings (IPO) and fundraising transactions did not need the FT to tell them that.
According to data produced by the London Stock Exchange, only 34 companies were listed during the year, a drop of 62% on the 2018 numbers and the lowest number since 2009. There were also significantly fewer secondary fund raises.
In fact, more companies left the LSE in 2019 than joined it and the new sums raised by entrants tended to be smaller, with some exceptions like Network International and Trainline who each raised more than £1bn.
The considered wisdom is that this was caused by political instability and the uncertainty around Brexit, but UK exchanges were not alone in seeing a reduced number of new entries and markets around the world experienced much of the same.
The concerns over the trading relationship between the US and China was often cited as the main cause along with general concern about the state of the world economy. Already jittery markets were not helped by some unsuccessful floats of big names including Uber and WeWork, with the latter having to be cancelled altogether. Globally, the number of IPOs fell some 19% year on year.
Although there have been a number of successful big-name floats, fewer companies are coming to the market and there are now fewer companies listed on public markets than has been the case historically. The number of companies with a stock market listing in the US has fallen by about 50% in the US and by about a quarter in the UK since the financial crisis. The AIM market has been particularly affected and the number of companies admitted has almost halved over the last 14 years from nearly 1,700 in 2006 to around 900 companies today.
‘Distracting and costly'
One reason for this could be the effect of post-financial crisis monetary policy and low interest rates making debt financing more attractive. Ambitious and growing companies may seek to avoid a lengthy, distracting and costly IPO process, and the ever more stringent post-float compliance burden that will follow it, and decide to stay private and use debt as their source of funding, despite the greater risk of insolvency than with an equity fundraise. In addition, the private investment scene in the UK remains healthy which enables investee companies to remain private for longer.
Looking at it from another perspective, companies with a current listing may consider that now is the time to leave the market.
The value of take-private deals in 2018 was about £3.8bn whereas the following year this number had increased to around £14bn. When a listed company's shares are trading at a discount, the lower valuation makes a take-private more attractive. Cheap money and large amounts of cash in private equity funds along with ever tougher corporate governance, compliance and reporting costs for listed companies, makes a private equity-backed take-private transaction attractive despite the often complex and highly regulated process.
With fewer IPOs, investors may seek a slice of the returns that an investment in private companies can yield indirectly through holdings in investment companies and investment trusts. The risk spreading across multiple investee companies, facilitation of investor participation in the later stages of private funding rounds and the potential for an upside if the investees do eventually opt for an IPO, are attractive features of such an investment.
However, the downside of holding illiquid stock were highlighted by the Neil Woodford fund collapse, and this and sometimes high multiples, might dissuade such investment.
The IPO market is likely to remain the principal home for investors' money. For the UK, the prospects for the market in 2020 initially looked promising following the end of the political instability and the transition from 10 years of coalition, wafer-thin majority and minority governments and the return to large majority, single party government under Boris Johnson and the Conservatives.
The likes of O2 (estimated market cap £10bn), Nigeria's Dangote Cement (£10bn), China's SDIC Power ($10bn), Walmart subsidiary Asda (£8bn), McLaren Group (£2.5bn), Tata Motor Group's Jaguar Land Rover (£2bn) and the food home delivery service Deliveroo (£3.2bn) were all reportedly considering listing in London in 2020. However, the "BoJo bounce" and the tentatively rediscovered confidence in the markets was to be short lived as the Coronavirus crisis hit.
Market volatility due to the virus has halted spring IPO activity despite the Financial Conduct Authority's determination to keep the markets open and continuing to review corporate transaction and admission documents.
Pricing an IPO is particularly challenging when volatility is at record levels. It has usually taken several months for the IPO market to return to normal levels, even after previous, less dramatic periods of volatility.
Some investment banks have indicated that they believe it is likely that sizeable discounts for investors will be needed in order to get new floats away, if a float is possible at all. There may be an opportunity for companies that have not been affected too seriously by the virus, if there are any, to float in the summer, providing things are starting to return to normal and lock downs have been relaxed by then, which is not a certainty. More are likely to take place in the autumn. Some, like insurance giant Prudential, will consider "other options" for capital raising and postpone their IPO or even abandon it completely.
However, investors may consider that some of the best returns in the past have followed periods of volatility because even fundamentally sound companies taking the IPO plunge will need to price at levels that will attract otherwise cautious investors.
Dean Harper is consultant solicitor at McCarthy Denning