Last week, EY released its regular IPO Watch report, which showed a marked slowdown in IPO activity in the second quarter of 2020, although listings picked up again in June.
Below, Dr Martin Steinbach, EY EMEIA IPO leader, discusses the current state of the IPO market, the outlook for the rest of the year and how companies should prepare to go public amid the uncertainty caused by the Covid-19 pandemic.
How did the global IPO market perform in the second quarter of 2020?
When we compare the second quarter of this year with last year, we are minus 39 percent by number of IPOs and minus 32 percent by proceeds. Here you see the impact of the pandemic, especially in the months of April and May. The good news is, when we look at June, we see a rebound in IPO activity. We had 54 IPOs in April, 43 in May, and then in June more than double the previous month with 89 – so we can see that the market is resilient and adaptable.
How did different sectors perform?
The sector appetite is for healthcare and technology. Across all the regions we cover – Americas, Asia-Pacific and EMEIA – these two sectors are in the top three for most IPOs. Investors are very selective and there’s a flight to high-quality equity stories. In all situations you have winners and losers and, this time, equity stories that are winners from or independent of the crisis are doing well.
What about the developments in different regions?
When we look at the second quarter, all regions are impacted by the pandemic. By number of IPOs, the Americas are down by 47 percent, Asia-Pacific by 18 percent and EMEIA by 66 percent. The whole world is affected, but at different levels. EMEIA is a market that relies on other markets, such as the US and China. If those markets are slowing in terms of GDP and order backlog, EMEIA as an export-driven area is more affected than others. Asia-Pacific has suffered the lowest impact. It has huge demand for capital due to the large number of growth companies.
Are there any other shared characteristics for the companies managing to go public?
When you look at other criteria, I always say size matters. The bigger the free float and IPO proceeds, the better, so you see a trend toward bigger transactions. We also see a rise in derisking strategies. In the US, we see special-purpose acquisition company (Spac) activity moving up. It’s a transaction technique used in volatile markets where you can’t predict on a short-term basis the right IPO timing.
How have the lockdowns and inability to meet in person affected IPO processes?
Investment banks and issuers have moved to a virtual environment. There was no option to meet an investor other than via a conference call or other virtual method. One good thing is you can reach many more investors with virtual tools – you don’t have to spend time traveling and waiting in airport lounges. You can focus your book building and roadshow activity on, let’s say, four to seven days, rather than 10 to 14 days. The risk of an external shock is much higher with a longer period.
Looking ahead, what is your current IPO outlook for the rest of the year?
If we look at the statistics, valuations came back to quite a good level. We saw a strong decline in volatility as measured by the VIX Index so everything is in place for a recovery in the second half of this year. But I’ve been in the market for 25 years and I’ve never seen so many centers of uncertainty: infection levels, GDP rate development, Brexit, how government programs will be financed, interest rates and central bank policies, the US election, the cohesion of the European Union and the oil price development.
Given the uncertainty companies are facing, how can they manage that while planning for an IPO?
The main market risk of an IPO is really in the placement phase where you are on a roadshow and something happens in the world. Due to volatility, prices and valuation multipliers are moving out of the IPO book-building price range. On top of that, uncertainties are negatively impacting investor sentiment to invest in IPOs. So how can you prepare for that?
- The first thing is IPO readiness. That means readiness in terms of the right infrastructure, the right processes, the right governance and the right content.
- Second is the right equity story.
- Third is: do you have the right board in place with credentials and experience in the sector?
- Fourth is the right timing – that depends a lot on your options so, if you are in stormy waters, what other options do you have? Options include a direct listing; a ‘safe IPO’, where you do the capital-raising first and then go public afterwards; Spac listing; reverse IPO; carve-out IPO; or IPO bonds.
- Fifth, select the right bank – the process to go public is a very traditional process but the pandemic has encouraged market participants to think about new approaches. You need an intermediary that is innovative toward IPO derisking strategies and open to different ways to list.
The good news is that we can take the best practices from the pre-Covid-19 period and the good things with virtual tools we learned during the pandemic phase, and combine them to improve IPO and pricing processes for future listings.
Dr Martin Steinbach is EY EMEIA IPO leader. The views reflected in this article are the views of the author/interviewee and do not necessarily reflect the views of the global EY organization or its member firms.