Last year saw a relative dearth in companies deciding to float, in fact only nine companies made initial public offerings in 2009 (compared to 36 in 2008 and 166 in 2007) raising less than £1 billion, a fifteen year low for the London Stock Exchange.
The global appetite for IPOs seems to be hotting up with Gartmore making a large initial public offering in December but according to Ernst & Young the window for companies to float could be relatively short. The uncertain recovery, an upcoming election and the withdrawal of certain government stimulus plans were cited as reasons why companies would decide to hold off another year.
Yet, there are many high profile flotations expected in the beginning of 2010, with New Look, Merlin Entertainment and Bird’s Eye among them.
Acromas, the result of the merger between AA and Saga, is expected to be the largest offering in Europe, with their private equity owners expected to ask between £5 billion to £6 billion.
The recession and uncertain markets has left its mark on investors. “During the recent market turmoil, investors globally have preferred to support companies already in their portfolios, hence we saw nearly 90 per cent of the £5.5 billion raised on AIM go into further issues last year,” says Marcus Stuttard, Head of AIM, London Stock Exchange.
But are investors keen to delve back into the uncharted territory of IPOs? Although a recovery of sorts may be afoot, it is still those organizations that are large and well established that will see benefits this year. Investors are still risk averse and are backing away from investments that are not solid. David Soskin, Chairman, mySupermarket.co.uk and Swapit.co.uk says: "The last couple of years have been really bleak for anyone considering a London flotation. There have been no technology listings since 2007. Early indications are that 2010 will see the market re-open. My guess is that some of the first companies to be floated will be the larger ones with heavy private equity investment.
“I believe that there will be an appetite for new companies who have both scale and a demonstrated track record. Smaller companies will probably have to wait a while until general investor sentiment is fully back to pre-1997 levels and the general appetite for risk is greater."
Notably almost all the companies that floated in 2009 did so on the Alternative Investment Market (AIM). Marcus explains: “As confidence has started to return to the market and valuations have improved, we are seeing a strengthening of the IPO pipeline, with firms from a broad range of countries and sectors keen to benefit from the access to capital and profile that an AIM quotation offers. I think that for many SMEs the drivers for being on a vibrant public market like AIM are stronger than they have been for some time, particularly with access to bank finance remaining more restricted than in the past.”
The lack of exit routes in the past two years is resulting in a strong flow of companies looking to float. Anthony Fry, Senior Managing Director, Evercore Partners says: "Markets continue to appear relatively benign and certainly vendors - particularly private equity houses - are preparing to raise capital through IPOs of investee companies. But, as Gartmore demonstrated, investors are demanding and pricing remains challenging. Add to that the fiscal uncertainties here in the UK which may or may not be resolved in the upcoming general election and you have the prospect of UK equity markets which may well be very skittish or worse through 2010."
Rian Urding, CFO, Intelligent Energy Holdings (who are thinking about doing an IPO in the future) is more hopeful than the rest. He says: “The markets will expect to see much more IPO activity during 2010. Confidence is returning and investors will be under pressure to show a path to better than average returns. There will be many businesses queuing up to make an appearance when conditions improve and this may even lead to a glut of IPO announcements. However, a sound investor proposition will be viewed much more favourably this year and ultimately businesses cannot shrink their way to prosperity.”
Although, the City is preparing for an increase in floats, it is clear that the upcoming election and stoppage of the stimulus plans are causing uncertainty among investors. The success of initial public offerings done this year will come down to confidence.
If you are interested in this week’s topic please take a look at our ‘Insight’ page which features articles and films on IPOs. In the film The Growth Dilemma: To Float or To Sell, Paul Dreschler talks about how a ‘multi-polar world’ is affecting growth.
Please get in touch if you have any comments about the issues in today's update.
I hope to see you soon,