The “Global IPO trends” report released by E&Y has shown how Coronavirus (COVID-19) and other global factors, such as dramatic fluctuations in oil prices, have had a pervasive impact on the Initial Public Offering (IPO) ecosystem.
IPO markets rode on the momentum carried from fourth-quarter (Q4) of 2019 into the first two months of 2020. However, activity slowed dramatically in March 2020 as a result of market turmoil not seen since the global financial crisis in 2008.
The experts in the report raised questions on whether the beginning of this decade is the end of the bull, adding that the impact on market volatility, equity indices and valuations will continue for the foreseeable future, “with a recovery not practical until Coronavirus (COVID-19) is under control.”
“The developing outbreak of the coronavirus disease (COVID-19) has superseded all other geopolitical and trade issues that affected Initial Public Offering (IPO) activity in 2019”, the report stated.
The report which E&Y releases every quarter looks at the IPO markets, trends and outlook for the Americas, Asia-Pacific and Europe, Middle East, India & Africa (EMEIA) regions. It provides quarterly insights, facts and figures on the IPO market and analyses the implications for companies planning to go public in the short and medium-term.
E&Y regional IPO leaders believe that the medium-to-long term IPO pipeline will continue to grow in major markets.
Implications for IPO candidates
IPO candidates looking to go public in 2020 face capital market volatility, risk on business growth and serious supply chain disruptions. IPO candidates considering an IPO will need to be prepared to complete the IPO quicker in narrower, and maybe short-notice transaction windows.
Also, they will need to think about digital options for remote roadshows; demonstrate resilience to the supply and demand shocks; prepare well with an IPO readiness assessment; adjust to more cautious IPO valuations as investors re-appraise their overall asset allocation; and consider other alternative funding or exit options such as debt, private capital, mergers and acquisition (M&A).
IPO leaders’ views
“Riding on the momentum from Q4 2019, global IPO markets continued to perform well in the first two months of 2020. The unexpected and novel events surrounding COVID-19 took a toll on the global health of equity markets and, together with other global market factors, have caused market turmoil not seen since the global financial crisis.
“This extreme market volatility makes any ambitions to go public highly uncertain. IPO candidates facing funding and liquidity challenges should also consider alternative funding mechanism as well as preparing to be ready when the next IPO window opens again”, said Paul Go, EY Global IPO Leader.
“IPO activity across the Americas saw a rise in Q1 2020 by volumes and proceeds compared with Q1 2019. While COVID-19 and oil tensions have largely dried up IPO activity for now, IPO preparation continues and the IPO pipeline is growing, as issuers look for opportunities to be prepared for calmer and more conducive markets”, said Jackie Kelley, EY Americas IPO Leader.
“Although COVID-19 has had some impact on IPO activity in the short term, with government policies and economic stimulus packages in place, IPO markets should see some improvement in the quarters to come,” said Ringo Choi, EY Asia-Pacific IPO Leader.
“In a historically slow first quarter, COVID-19 has impacted capital markets sentiment, as EMEIA is more exposed to any impacts to cross-border supply chains. Combined with record levels of market volatility, IPOs were postponed which lowered IPO activity in Q1 2020. We see IPO candidates even more challenged to determine the right timing and pursue the right de-risking IPO strategies that provide access to funding for further growth. With central banks and governments in a ‘whatever it takes’ mode, we expect IPO activity to pick up in H2 2020”, said Martin Steinbach, EY EMEIA IPO Leader.
IPO market in review
Vibrant stock markets in the America supported steady IPO activity in the first two months of first-quarter (Q1) 2020. However, there was a notable drop in IPO activity in March 2020. In America, IPO pipeline continues to build, but activity this year will largely depend on COVID-19 perception, market conditions and tone of the US presidential election.
IPO activity in Asia-Pacific remained robust through the first two months of 2020 –in Q1 2020, IPOs rose 28percent by deal volumes and 110percent by proceeds compared with Q1 2019.
In this region, COVID-19 has supplanted geopolitical and trade tensions, and the US presidential election as the top issue affecting IPO activity in 2020. E&Y expects to see a balance between more traditional sectors and high tech as various 5G, pharmaceutical and property management companies continue with their plans to go public in 2020.
In Europe, Middle East, India & Africa (EMEIA), the IPO markets showed mixed results in Q1 2020. There, IPO activity got off to a slow start in January, picking up the pace in February and then falling off in March.
IPO numbers fell 31percent compared with Q1 2019, while proceeds rose 133percent. In EMEIA region, economic activity remains vulnerable to increasing disruptions for the remainder of the first half (H1) of 2020. As such, E&Y said it does not expect IPO activity to improve until the second half of 2020 at the earliest.
Global IPO activity in the first two months of 2020 was 29percent higher by deal numbers and 242percent higher by proceeds compared with the same time period in 2019, largely carried by Asia-Pacific and US exchanges. With the sudden drop in equity indices across many markets, the global equity markets have been thrown into turmoil. Governments have responded by introducing policies and economic stimulus packages to inject liquidity into the financial system and provide aid to industries that are most vulnerable. Meanwhile, central banks are cutting interest rates and implementing supportive monetary policies.
For the Middle East and Africa regions, the recent spread of COVID-19 and the fluctuation in oil prices are impacting the region. Businesses and investors are likely to proceed with caution in the coming months. Amid ongoing market volatility, IPO-bound companies will need to take extra care with de-risking mechanisms, particularly related to transaction type, investor appetite and IPO fitness.
Market volatility in EMEIA rose substantially to record levels, based on the VDAX, VFTSE and VSTOXX during March 2020 as the COVID-19 outbreak raised fears of an economic downturn in this region. With indices and valuation levels falling and market risks rising with volatile markets, many IPO-bound companies have postponed their plans to go public. As an importing and exporting region, EMEIA is more exposed to any impacts to cross-border supply chains. With many of China’s factories shut in February, which slowed supply, and with the spread of COVID-19 throughout Europe slowing demand and supply, EMEIA is feeling the economic impact as countries work to contain the impact of COVID-19. As a consequence, IPO activity in EMEIA was subdued in Q1 2020.
Sectors have been differentially impacted by COVID-19. While technology, health care and industrials remain largely unaffected, consumer staples, consumer products (such as travel), retail sectors are feeling the downward effects. In Europe, with selected countries in quarantine and others trying to stem the spread of COVID-19, Q1 2020 European deal numbers fell 25percent below Q1 2019 numbers, which were much lower than Q1 2018. However, by proceeds, Europe saw a 225percent increase over Q1 2019 due to notably higher average deal size this quarter. In the UK, IPO deals began to flow, albeit more slowly than expected, following the exit of the UK from the European Union (EU). The UK posted 25percent fewer number of deals in Q1 2020 compared with Q1 2019, but proceeds were up 329percent.
The Middle East and Africa regions rode the momentum from Q4 2019, launching seven IPOs raising $929million in total in Q1 2020, an increase of 75percent in deal numbers and 620percent in proceeds over Q1 2019. In India, as the decline in economic growth continues, Q1 2020 deal numbers are down 50percent over Q1 2019, while proceeds are up 43percent over the same time last year.
In the US, the CBOE Volatility Index (VIX) rose to all-time high of 82.69 on March 16, 2020, the highest level the index has reached since November 2008 when it hovered in a similar area. In EMEIA, volatility indices for EURO STOXX and Germany’s VDAX both saw their highest levels since the global financial crisis. As a result, E&Y expects high market volatility and uncertainty to impact IPO activity in March and into second-quarter (Q2) 2020.
COVID-19 notwithstanding, investors remain cautious about valuations of unicorns and technology IPOs based on the lacklustre performance of high-profile IPOs that have underperformed post-IPO. By proceeds, the Shanghai Main Board and STAR market-led in Q1 2020, followed by NASDAQ and Thailand exchanges. By deal numbers, Hong Kong, Shanghai and Tokyo markets led the way. Industrials, technology and health care were the most active sectors in Q1 2020 by deal volumes and proceeds. Private equity- (PE) and venture capital- (VC) backed IPOs accounted for a notably higher proportion of IPOs in the Americas, compared with APAC and EMEIA. They represented 25percent of Americas IPO deals in Q1 2020.