ECM bankers' hopes of another jumbo bonus at the end of the year have already dimmed just one month into 2022 as the prospect of tighter monetary policy and the slump in stock prices into correction territory have forced many issuers to revisit their plans to go public.
In the US, January has seen just five IPOs price, the latest being the downsized US$200m Nasdaq IPO of chipmaker Credo Technology on Thursday. February could be even slower as the valuation reset means that the average loss from last year's 300-plus US IPOs is now above 30% (as of Thursday's close).
Those losses have both battered investors' portfolios but also massively reduced the value of companies in the pipeline.
Hyundai Engineering pulled its up to W1.2trn (US$1bn) IPO at the end of bookbuilding with the South Korean construction company saying investors were not valuing the company properly (See story below). Similarly, the parent of file-sending service WeTransfer cancelled the first major European IPO of the year after bookbuilding on the €250m Euronext Amsterdam float stalled, having launched with optimism that a combination of long-term profitability and high growth was exactly what investors wanted.
Bruised by a surge in volatility (the VIX has nearly doubled this year to trade above 30 for much of the past week) and a 14.7% decline in the Nasdaq Composite Index so far in 2022, many investors, particularly hedge funds that often play the ECM calendar, have decided to steer clear of new issues.
“The majority of issuers are waiting to see stability in the markets before launching transactions across products,” said David Ludwig, global head of ECM at Goldman Sachs.
Hawkish turn
Last week's FOMC meeting only reinforced the US Federal Reserve's hawkish turn late last year as it looks to control inflation by raising rates and shrinking its balance sheet after adding trillions to the money supply during the pandemic.
Wall Street bankers nevertheless are doing their best to remain upbeat about activity levels over the course of the rest of the year as they look to execute their bloated pipelines.
In the US, eyecare health company Bausch & Lomb, car-sharing app Turo, mattress retailer Mattress Firm, self-driving technology firm Mobileye, fintech Chime and the life division of insurer AIG lead a long list of 2022 IPO candidates.
“As incremental clarity emerges on what moves the Fed actually makes and we make our way through earnings season, which happens to open the window for corporate repurchase activity, we expect to see improving risk appetite and broader access to the new issue market,” Ludwig said.
Go slow
Conveniently, February is often a slower month for new issues anyway. Not only does it coincide with the busiest weeks of the earnings season but any company going public after Valentine's Day cannot use third-quarter financial statements. This usually results in lighter ECM volume as annual numbers are produced.
The US IPO market is in “a period of consolidation” and “searching for equilibrium” but could become very busy again as soon as March or April, said Eddie Molloy, Morgan Stanley’s co-head of ECM in the Americas.
“The market is trying to figure out where to settle and what valuations should be and what’s the new equilibrium,” Molloy said. “It takes a little bit of time. When things are volatile, it’s sometimes hard to get investors sufficiently confident about pricing a new story efficiently – and it’s hard to take several weeks of execution risk. So it’s sometimes better to take a breather.
“[But] I don’t think there’s any structural change in the way people think about new stories or there is some permanent impairment. I don’t think that’s the case at all.”
Increasing worries
The European preference to complete IPOs using full-year numbers (rather than those from the third quarter) usually means the first month or two of each year is quiet – last year's busy January was highly unusual – but bankers are increasingly worried that a hoped for burst in late February and March is now unlikely. That will be a blow as that period was set to be very busy.
“There is a lot of resetting of expectations around valuations for IPOs that needs to happen right now,” said a head of syndicate in EMEA.
“There is a disconnect between issuer expectations that were pitched several months ago and the reality of the new world in Europe,” he said, based on current early-look meetings for deals expected to launch towards the end of the first quarter and throughout the second.
There are some names that investors are certainly keen on at the right price. They include Swiss skincare business Galderma, owned by Nordic private equity firm EQT; ThyssenKrupp’s hydrogen electrolysis business Nucera; Axel Springer’s jobs website Stepstone, where Rothschild is advising; Coca-Cola Beverages Africa; and private equity firm CVC Capital Partners.
But many of the other expected 40–50 IPOs in the pipeline across EMEA are in greater doubt, even though bankers note that investors are still engaged – with one pointing out that investors did not pull orders from WeTransfer – with the real issue being the distance between where investors want to buy and sellers want to sell.
Quiet in Asia
In Asia in contrast, January is usually a busy month as issuers look to price before the Lunar New Year holidays that generally come in February.
However, the first month of the year has been exceptionally quiet with only one sizeable IPO completed in the region – the W12.8trn (US$10.8bn) Korea Exchange IPO of electric vehicle battery manufacturer LG Energy Solution.
Shares of LG Energy, a market leader, were sold at an attractive discount to the closest comparable and the company made a stellar debut with shares surging 68% on Thursday as a result.
Others were less lucky. SoftBank-backed Chinese artificial intelligence start-up Qingdao AInnovation Technology saw its shares tumble 26% on debut on Thursday after raising HK$1.18bn (US$151m) from a Hong Kong IPO. Philippines' Citicore Energy Real Estate Investment Trust downsized its IPO to Ps5.56bn (US$108m) on the same day.
Shares of Chinese property developers Logan Group and Times China Holdings plunged 15.7% and 26.8% on Thursday after raising a combined US$301m from equity offerings, mirroring sell-offs in the property sector on concerns higher interest rates will raise financing costs.
With China yet to release the final rules governing overseas listings and as concerns over the property sector linger, bankers believe there will only be a few deals coming from Chinese technology companies and Chinese developers – traditionally the most active issuers – in the first quarter, although some encouragement came from news that JD Technology will attempt a US$1bn–$2bn Hong Kong IPO (See p6).
Many hopes rest on the mammoth domestic IPO of Life Insurance Corp of India, which could hit the market as early as March. The country’s largest life insurer is expected to raise US$5bn–$10bn.
An emerging market banker said his region was higher up the risk spectrum and “in a risk-off environment EM IPOs are harder to complete”.
“Sentiment is definitely on the back foot,” the EM banker said.
He said most EM IPOs are on hold though some issuers could visit London in February.
One factor that could be crucial in partially offsetting current issues is increasing talk of a return to face-to-face meetings for pilot-fishing. Buyers and sellers once again meeting across a table could be vital in bridging any valuation gap.
