LONDON/NEW YORK: Investment bankers are bracing for another tough year ahead after losing out on lucrative fees from arranging initial public offerings (IPO) and other share sales, as questions around monetary policy and a looming recession dampen hopes for a near-term rebound.
Banks have executed US$517 billion (RM2.29 trillion) worth of equity capital markets (ECM) transactions to date in 2022, the lowest level since the early 2000s and a 66% drop from last year's deal bonanza, according to Dealogic data.
“ECM activity tends to be higher in periods of distress or where growth is strong, and today we’re in no man’s land,” said Gareth McCartney, who co-leads UBS’s global franchise.
The IPO market all but ground to a halt this year, as Russia’s invasion of Ukraine and interest rate increases from central banks weighed on the broader economy.
Barring exceptions such as Porsche’s blockbuster €9.4 billion (RM44.3 billion) offering in September, most major flotations, including those of Swiss dermatology specialist Galderma and SoftBank Group Corp-owned chip designer Arm, were deferred until market conditions improve.
“We’re entering a new recessionary world we haven’t seen in a while,” said Valery Barrier, co-head of EMEA ECM at Citi. “We’re going to see more primary capital being raised, more convertible bonds to cheapen the cost of financing and non-core shareholding being sold.”
As the cost of debt continues to rise, bankers expect companies to turn to equity solutions as a way to manage their balance sheets and protect their corporate ratings. Recent examples of such deals include French videogame developer Ubisoft's €470 million convertible bond and Credit Suisse's 4 billion Swiss franc cash call.
Banks are hoping that a recent pickup in block trades and capital raising will spill over into the new year and pave the way for future IPOs.
“Volatility has come down, so markets have the ingredients for issuance to pick up,“ said Alex Watkins, co-head of ECM at JPMorgan for EMEA.
Global equities slid last week following a string of hawkish announcements from major central banks. But some investors are betting that interest rates will start to plateau sooner than policymakers have indicated, as inflation shows signs of peaking.
A return by long-only investors to capital markets deals is seen as key for any recovery, after a year in which hedge funds have taken a lead role as buyers of new issuance.
“It’s fair to say that at times throughout 2022 the accelerated book build activity has seen proportionately more participation from hedge funds,” said Antonio Limones, head of EMEA Equity syndicate at Credit Suisse. “But long-only demand has started to increase.”
Some market participants are waiting to see where valuations settle before they commit to new deals, said Gerry Keefe, head of global banking for the Americas at HSBC.
The structure of transactions will also be a crucial factor in the success of future IPO, particularly for private equity-backed companies that carry large amounts of debt.
“What you’ll probably see is deals come to market that are heavily de-risked, following in the footsteps of Mobileye in the US,“ said Lawrence Jamieson, head of EMEA ECM at Barclays. The world’s biggest private equity firms, which were forced to postpone the floats of several dozen IPO-ready portfolio companies this year, are expected to remain circumspect for the next few quarters.
“The question is whether we’re going to see private equity investors getting comfortable with selling at lower valuations,” said James Palmer, head of EMEA ECM at Bank of America. “A lot of this will come down to an assessment of the investment’s return profile, as well as overall relevant fund dynamics.”
A bright spot for IPO has been the Middle East, where privately held and state-backed businesses are turning to markets for capital and liquidity – such companies have raised more cash this year through new listings than Europe and Africa combined.
Earlier this month, Saudi oil refiner Luberef priced its US$1.3 billion share offer at the top of the initial price range on the back of strong investor demand. Restaurant operator Americana also pulled off a US$1.8 billion dual listing in November.
However, a longer road to recovery awaits the rest of the world.
“When the stock market is going like this, people typically don’t buy new issuance,” said Joshua Bonnie, co-head of Simpson Thacher & Bartlett’s global capital markets practice. – Reuters