You are here

Global IPOs make risk attractive again to yield-hungry investors

The global market for initial public offerings may finally be offering some encouraging signs to investors hungry for returns.

[NEW YORK] The global market for initial public offerings may finally be offering some encouraging signs to investors hungry for returns.

Following a first quarter that was the slowest start to global listings since the financial crisis, the second quarter ushered in several billion-dollar-plus offerings and an average share jump of more than 30 per cent. 

Danish utility company Dong Energy A/S raised US$2.6 billion on June 9, China Zheshang Bank Co raised US$1.9 billion in March, including an overallotment, and food distributor US Foods Holding Corp raised about US$1.18 billion last month.

Companies are preparing more ambitious offerings, emboldened by the relatively positive performances and size of deals since April, as well as a more stable market. Shares of the largest IPOs this year have climbed or stayed even with their listing price, and that's encouraging for potential investors, according to Stephen Pierce, global head of equity capital markets at Goldman Sachs Group Inc.

"A good number of investors are looking at IPOs as a category of investment that they have to pay attention to, especially as they try to catch up to the benchmarks," he said.

While less money has been raised overall, shares of companies that went public this year with offerings bigger than US$50 million have climbed 35 per cent on average, according to data compiled by Bloomberg, excluding special purpose acquisition companies, real estate investment trusts and funds. The MSCI ACWI Index of global equities is flat for the year.

Already for the third quarter, Japanese messaging service Line Corp is planning the biggest global technology IPO this year, seeking to raise as much as 113 billion yen (S$1.44 billion) in July. Univision Holdings Inc, the largest Spanish-language broadcaster in the US, is targeting the second half of the year for its initial offering, which could raise as much as US$1 billion, people with knowledge of the matter said in April.

It wouldn't take much to be encouraging. Global volume in the year through June 13 plunged 52 per cent to about US$36 billion, according to data compiled by Bloomberg, compared with US$75 billion in the same period a year earlier. Concerns about China's economy, languishing oil prices and uncertainty about central banks' outlook on interest rates rattled investors' nerves and kept companies on the sidelines.

European stocks have led the resurgence in the second quarter, as companies and governments sold shares. Corporates listed in the region raised more than half of the US$23 billion in new shares sold globally from April through June 13, followed by US$6.6 billion in Asia and US$4.5 billion in North America, the data compiled by Bloomberg show.

"From a global perspective, the European IPO market has been more consistent year-to-date," said Liz Myers, head of global equity capital markets at JPMorgan Chase & Co.

The US and Asia were more sporadic in the first quarter but are "picking up steam" since April, she said.

Dutch companies alone announced a slew of initial offerings in May, setting up the country's busiest second quarter for IPO announcements in 17 years, according to data compiled by Bloomberg.

One reason is the UK's looming vote on staying in the European Union on June 23, making IPO candidates eager to act before the outcome, which could upset markets again.

Dong Energy's IPO is the biggest so far this year. Fourth place also goes to Europe: AS Nederland NV raised 1.02 billion euros (S$1.55 billion), helping the Dutch government to recoup some of the money it spent bailing out the company's parent during the financial crisis.

Depending on the outcome of the UK vote, the flurry could continue. If the country stays in the EU, it could diminish fears about volatility and make conditions better for companies to go public, according to Brian Reilly, global head of equity capital markets at Barclays Plc.

In the US, investors reduced bets on equities after a stock market rout through February. Mutual funds hoarded cash and hedge funds - which also posted their worst start to a year since the financial crisis - unloaded stocks. While IPOs can offer the chance of better returns, they also offer more risk because there's no trading history to evaluate and a shorter history of financial results.

Now, with a sustained rally and the S&P 500 Index having climbed 14 per cent since its February low, investors may be willing to bet on new stocks again.

There are several companies preparing to go public in the US. In addition to Univision, American International Group Inc's mortgage insurer, United Guaranty Corp, filed its initial prospectus in March. The company may seek to raise US$700 million to US$800 million, people familiar with the matter said in May, giving it a market value of about US$4 billion.

Jeld-Wen Holding Inc, the maker of windows and doors backed by Onex Corp, filed its initial prospectus on June 1, and could be valued at about US$5 billion in its IPO, people with knowledge of the matter said in April.

A major factor in the decline of US IPO volume is the dearth of venture capital-backed technology startups.

In 2016, only one has gone public. Acacia Communications Inc, the maker of equipment and software for communications networks backed by Matrix Partners, Commonwealth Capital Ventures and Summit Partners, raised US$119 million in May, including an overallotment to underwriters.

In the same period last year, six such companies went public on US exchanges, including website platform GoDaddy Inc and online craft marketplace Etsy Inc, raising a total of US$1.3 billion.

Given that there are more than 160 companies that have been valued at more than US$1 billion in private funding rounds, according to CB Insights, that may not be surprising. Many of those businesses have received what are known as crossover funding rounds, where traditional public investors pumped in cash.

With valuations so high, it's left private technology companies hesitant to go public, for fear of taking a haircut - accepting a lower value than they've garnered in financing.

"In tech, we have been at an impasse," Mr Reilly of Barclays said. "The companies and venture capital firms want higher valuations, particularly those that did crossover rounds in 2015, and the buy side doesn't want to pay those valuations."

A test of tech valuations will come soon. Twilio Inc, the maker of web and mobile applications backed by Bessemer Venture Partners, set terms for its IPO on Monday.

The company seeks to raise as much as US$140 million in the offering, scheduled to price on June 22, according to data compiled by Bloomberg.

In addition to Britain's upcoming referendum, challenges over the next few months that could affect risk appetite and market volatility - and the IPO market - include the US Federal Reserve's action on interest rates.

While there is uncertainty in the mix, global equities continue to hit new highs. That could prompt hedge funds and mutual funds to stomach more risk, said Jim Paulsen, chief investment strategist at Wells Capital Management.

"They're starting to feel a little heat," said Mr Paulsen, whose firm manages about US$350 billion. "If we do go up to the upside, there's got to be a lot of pent-up demand for IPOs."