Following a dearth of initial public offerings (IPOs) in the second quarter, the London Stock Exchange looks set for a busy autumn as life starts to return to a degree of normalcy.
IPO activity pretty much ceased in the second quarter as the markets grappled with the economic consequences of the Covid-19 lockdowns.
IPO volumes fell 81% compared with the same period a year ago, with just two Venture Capital Trust (VCT) listings on the main market and none on the alternative investment market (AIM), according to law firm Squire Patton Boggs.
Now, the market is anticipating a resurgence of activity - both from newly launched IPOs and from IPOs that were put on the back burner at the start of the pandemic.
Although physical IPO roadshows are off the agenda, the vast majority of the work involved in a stock market flotation is able to go ahead, albeit remotely.
For private companies whose investors are keen to realise their returns through a liquidity event, the return of IPOs will be heartily welcomed and will provide an avenue for retail investors looking to invest in small and potentially fast-growing businesses.
But with the market surging and the rest of the economy still in tatters, market participants need to approach valuations with great caution.
There are many factors that go into pricing IPOs and many of these are influenced by the broader market environment. These include the company's growth potential, its finances and business model, the price of similar listed companies and demand from investors.
Valuing a private business is fundamentally the same, but there are three primary differences - control, liquidity and market sentiment - which, together, can determine which financing route the business chooses.
In recent years, businesses have increasingly opted for private capital as a means of financing.
Private equity and venture capital investment into UK businesses reached £22.33bn in 2019, an increase of £1.6bn on the previous year, according to research from the British Private Equity and Venture Capital Association (BVCA).
In contrast, there were only 35 IPOs in London last year compared with 79 IPOs in 2018.
One of the key advantages of private equity is the control factor. There is usually just one owner or a small consortium of owners who are able to take a hands-on approach to managing the business and make swift decisions without having to hold a shareholder meeting.
On the flipside, private companies lack liquidity - it takes months, at best, to sell a private company. And if a private investor sells the business to another private equity firm, the buyer will usually apply a discount because of the asset's illiquidity. In contrast, this illiquidity drag is lifted when the company goes public.
In the IPO market, however, market sentiment can have the most material impact of all, whether positive or negative. Moreover, market sentiment can sometimes be at odds with the fundamentals of asset valuation.
Currently, one could argue that IPO valuations are benefitting from pent-up demand for public listings during the pandemic, making an IPO a good option for businesses looking to raise capital at favourable valuation levels.