IPO activity across Europe is projected to fall from €57.4 billion last year to €25.1 billion this year, as uncertainties from Brexit bite. The London’s main market, in particular, has seen a dearth of activity, following a boom at the end of last year as PE firms exited their high-value UK portfolio companies. The expectation is for an increase in IPO activity in the near term, as the dust settles.
Uncertainty in Europe following the Brexit vote, the upcoming US Presidential elections, as well as China’s slowing economy, are taking their toll on companies’ appetite for initial public offerings (IPOs), according to a new report by PwC titled ‘IPO Watch Europe Q2 2016’.
The analysis highlights subdued activity from the start of 2016. In Q4 2015, IPO activity across the world was running red hot, following a lacklustre Q3 2015 – in total there were 377 IPOs with a total value of €60 billion. During the start of the year, amid a crisis on the Chinese stock market and uncertainty in Europe, IPO activity fell to the lowest level in almost three years, with just 222 IPOs raising just over €10 billion. The second quarter has seen a relative uptick in activity, with 243 IPOs raising around €25 billion.
European market hesitation
Activity in Europe was particularly subdued at the start of 2016, with 50 IPOs raising €3.5 billion, down from €21.7 billion in the previous quarter. Activity picked up in the second quarter, however, with a total of €10.9 billion raised across 95 IPOs. Projections from PwC are for a year total of around €25 billion, down significantly on last year’s €57.4 billion.
The analysts’ report that much of the IPO activity (70%) for Q2 2016 was on continental exchanges, particularly the OMX, Euronext and the Spanish exchanges. Deal activity was boosted by a range of spinoffs and privatisations, including Dong Energy (€2.3 billion) in Copenhagen and a.s.r. (€1 billion) and Philips Lighting (€863 million) in Amsterdam.
Mark Hughes, capital markets leader at PwC, remarks, “Following the referendum result, there have been a number of transactions postponed due to concerns over market uncertainties. That said, the majority of companies pursuing IPOs for the second half of the year are maintaining their plans. Improved political stability and greater clarity over the UK’s progress on negotiations with the EU will be key to IPO activity picking up again post the traditional quiet summer period. Provided this is the case, the successful completion of the first IPOs coming to market post-summer will set the tone for the remainder of the year. Whilst I do not see activity coming to a standstill, European IPO levels are unlikely to reach the €25 billion mark for the year.”
The London exchanges, Main & SFM and AIM, have had relatively slow quarters from the start of 2016, although slow quarters are not uncommon – particularly on the Main & SFM. In total, there were 18 IPOs valued at €1.8 billion at the start of the year, with an even split in terms of deal volume between the markets, while the Main & SFM took in the most in terms of value (€1.6 billion). Q2 has seen deal value plummet to €900 million, with the AIM market generating €748 million from 14 deals.
The effect of uncertainties surrounding the EU referendum result have, according to the firm, caused the London share of European IPOs to drop to the lowest level since 2009, at 11% of total. The fear that the EU referendum would see a large scale cancelation or postponement of planned IPOs across Europe hasn’t materialised, according to the firm’s analysis – with cancelation and postponements at the same level as previous years, although fewer firms explicitly planned to go public.
PE backed exits
The research also sought to identify whether there are substantial changes in the level of PE backed IPOs vs non-PE backed IPOs. The results highlight that the first two quarters saw increased non-PE backed IPOs by value, while Q4 2015 saw a large jump in PE firms seeking to exit high value portfolio companies in London – possibly before referendum uncertainty started to affect buyer appetite. In terms of deal volume, however, PE to non-PE deals stood at around 50% in the first two quarters of 2016, with Q4 2015 seeing a slightly higher number of PE backed exits than long standing trends.
Vivienne Maclachlan, Capital Markets Director at PwC, says, “Companies, investors and bankers are all still grappling with what the referendum result means for the UK economy as well as the rest of the EU. Following the initial tumble, the FTSE 100 has recovered to its highest levels since August 2015 whilst the FTSE 250 continues to be hampered by concerns over the UK economy. The financial services sector has been hit hardest along with a broader impact on domestic UK businesses. Over the coming quarters I expect investors to favour IPO candidates with a global exposure and/or offering steady yields.”