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Global IPO activity slows as companies wait out instability

09 May 2016 Consultancy.uk

The start of 2016 has seen a marked decrease in IPO activity, down 39% by volume and 70% by value on the same period last year. The Chinese slowdown, lower commodity prices and political crisis in the EU are some key factors attributed to companies holding off their initial public offering. The coming year is likely to see increased activity, however, according to a newly released report.

IPO and M&A
Much has been made of last year’s M&A activity; records were broken and up to $4.9 trillion was moved between buyers and sellers. The IPO market too was relatively strong in terms of volume over the past two years, with around 1,200 companies going public last year. The value of deals has been fluctuating wildly, at between $20 billion and $40 billion across the quarters of 2015. The first quarter of 2016 has seen a considerable drop in M&A deal value and volume compared to the first quarter of 2015, which too appears to be the trend within the global IPO space.

Global IPO 
Globally, between February and March 2016, there were 167 IPOs valued at $12.1 billion. Both deal volume and deal value are down compared to the same time last year, by 39% and 70% respectively. The Asia-Pacific region has been by far the most active in terms of IPO value and volume, at 61% of all public offerings and the raising of 54% of all value. North America, has seen particularly lacklustre IPO activity, with 7% of all IPOs by volume and 6% by value.

The relatively gloomy figures are, according to EY, the result of a range of factors. Key among them is the bumpy start to 2016, in which there was considerable turmoil across financial markets, with sharp selloffs, particularly on the Chinese exchanges. The slowdown in China further resulted in a drop in commodity prices, particularly oil. The low oil price has been a factor in significantly decreased stock market sentiment, prompting lower and more volatile equity prices in many markets. Regional- and geo-political volatility has further put the wind up investor sentiment. The EU’s crisis surrounding refugees and the possibility of a Brexit, are placing pressure on Europe, while the looming US presidential election is clouding the outlook for both economic and foreign policy. Economic policies, and the uncharted territory of negative interest rates, are creating further concerns about the potential for renewed crisis and latent systematic risks within the global economy. 

While negative sentiment has weighed on companies and PE firms to go public with the companies, the rest of 2016, the consultancy notes, may see improved IPO figures. A number of factors are expected to create a more equitable environment, the ECB continuing to stimulate the European market with capital may be a long term positive for the region, while the Chinese authorities are also formulating specific measures to support the IPO market, including a compensation regime, which aims to prevent IPO fraud. The Japanese monitory policies, recently introduced, of negative interest rates, are also said to stimulate IPO activity within the country. The deal pipeline too remains relatively robust, with private equity firms, seeking to exit their portfolios, too remaining a key pipeline of possible IPOs. 

EMEIA IPO
The Europe, Middle East, India & Africa regions saw the lowest quarterly number of listings since the first quarter of 2009, and the lowest quarterly capital raised since the third quarter of 2012. Year-on-year activity in terms of volume was down 43% while proceeds decreased by 76%. In total, there were 51 IPOs, raising a total of $4.7 billion in proceeds. The region saw a median deal size of $63 million during the first quarter of 2016, compared to $96 million in the same period last year. Many of the deals, 28 of 51, were on the junior markets, while 35 of the 51 IPOs had IPO proceeds of less than $50 million.

The region, covering diverse geographies, is likely to enjoy stronger activity during the rest of 2016. India is expected to boom, supported by a growing appetite for equities and an uptick in economic growth; IPO activity in Africa is expected to surge as regulators are looking to integrate capital markets within this region; Egypt may see increased activity as the government seeks to sell off state assets; and European IPO activity should pick up going into the second quarter with steady economic recovery and continued monetary easing.

UK IPO
The UK market too got off to a slow start, although its performance was well above the global average. The start of 2016 saw 16 deals with proceeds of $2.7 billion. This represents a decrease of 20% by volume and 41% by value of deals. The IPOs that did go through, have generally performed 7.5% above their initial list values. The two big deals at the start of the year were from two challenger banks – Metro Bank, which raised $613 million, and CYBG (the listing of Clydesdale and Yorkshire Banking Group), which raised $566 million. 

The referendum to stay or leave the EU will be held on the 23rd of June, and is one element causing considerable market upheaval within the industry. The effects are however, only likely to stall activity in the near term, and the consultancy expects activity within the UK market to increase toward the end of 2016. The UK economy remains relatively robust, and PE backed businesses will continue to be exited this year.

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.