From Silicon Valley to Saudi Arabia, IPO bankers face headwinds

Washington

FROM Silicon Valley to Saudi Arabia, it's been a tough year for IPO bankers. Wall Street kicked off the year excited about money it would make bringing to market some of the world's most iconic companies.

A crop of startup unicorns from Uber Technologies to WeWork were preparing to sell shares. Then the world's most profitable company, Saudi Aramco, started gearing up for its own initial public offering.

Fast forward and these deals have become emblematic of how things can go wrong.

Uber's shares have tumbled and WeWork scrapped its offering, causing other tech giants to reconsider their listing plans. Most of Aramco's arrangers made almost no profit even after it became the world's biggest-ever IPO.

The top global banks' fees from equity capital markets transactions are set to fall as much as 15 per cent this year, according to research firm Coalition.

The trend could worsen in 2020 as more companies such as Airbnb shun the traditional IPO process to pursue listings with less involvement from Wall Street.

"This year has been a challenging one for ECM (equity capital markets)," said James Roe, a partner at London-based law firm Allen & Overy. "There are global headwinds beyond Brexit - global trade wars, China's economic growth, the current situation in Hong Kong, and economic conditions in Europe - all of which have had an impact on IPO activity."

IPOs globally this year have raised US$229 billion, down 1.4 per cent from the same period in 2018, according to data compiled by Bloomberg. Fundraising in the US is up 7.7 per cent to US$69.6 billion, though performance has been weak.

The average new listing in the US has gained just 11 per cent since the start of trading. That makes offerings look less attractive in a year when the benchmark S&P 500 Index is up 29 per cent.

Tech IPOs in the US have done even worse, with the average deal now trading 3 per cent below its offer price, the data showed.

The US-China trade war and political issues in Washington hurt the overall market environment, leading to increased volatility and making it "very difficult" to price deals properly, said Maegen Morrison, a partner at the law firm Hogan Lovells.

"Going into the beginning of this year, everyone was hoping for a healthy global IPO pipeline," she said. "But IPOs tend to be affected by market volatility, confidence and overall economic conditions."

Aramco was one of the biggest disappointments for bankers. Some spent years wooing the Gulf energy giant to get a role on the deal, promising Saudi Crown Prince Mohammed bin Salman the company would be worth US$2 trillion.

Then they failed to drum up interest from overseas investors at that valuation.

The Western banks were sidelined when the deal became a domestic affair, leaving the lion's share of fees for the local arrangers who took control of the process. The top foreign underwriters on the deal are set to make only US$3.5 million apiece.

And then there's the fall from grace of WeWork, the office-sharing company co-founded by flamboyant entrepreneur Adam Neumann.

WeWork went from being one of the most-anticipated IPOs of the year to scrapping its listing and accepting a rescue package at a fraction of its previous valuation.

JPMorgan Chase & Co chief executive officer Jamie Dimon said in November that companies heading toward IPOs should study WeWork's case and admitted that he learned a few lessons himself.

Palantir Technologies, the data-mining firm backed by billionaire Peter Thiel, has decided to keep raising funds in the private markets instead of a near-term IPO, people with knowledge of the matter said in September.

Beyond Meat's surge

Airbnb and unprofitable food-delivery company DoorDash are both considering direct listings next year, which would allow them to become publicly traded without raising funds. Bankers predict at least five such deals in 2020.

"Some IPOs materially disappointed this year, which coloured perception of the product generally and, at times, impacted investor willingness to participate in deals," said Taylor Wright, co-head of US equity capital markets at Barclays.

It hasn't been all bad. Jeans brand Levi Strauss & Co and cybersecurity firm CrowdStrike Holdings both jumped on their US trading debuts.

One of the best performers has been Beyond Meat, the maker of plant-based meat alternatives, which has more than tripled since its May IPO in New York.

Another recent bright spot has been the Asia-Pacific, which is closing out its best quarter for new listings in nearly a decade.

First-time share sales in the region have raised US$43.6 billion since the start of October, led by Alibaba Group Holding's US$12.9 billion Hong Kong offering.

That's helped reshape the league tables, bumping up both China International Capital Corp and Citic Securities.

The moves mean the 10 most active IPO arrangers globally now include two Chinese firms for the first time since 2009. HSBC Holdings, one of the lead banks on the Aramco IPO, moved up 14 spots to join the top ranks for the first time in four years.

Rising valuations in the public markets could encourage more companies to list next year instead of raising money through private funding rounds, according to Francois-Olivier Mercier, UBS Group's head of ECM syndicate for Europe, the Middle East and Africa.

Listing hopefuls

There are plenty of listing hopefuls lining up for 2020. Reynolds Consumer Products, maker of Hefty trash bags, and J Crew Group's Madewell denim brand are among firms planning IPOs.

Internet startups such as online mattress seller Casper Sleep and resale marketplace Poshmark are also preparing offerings, people familiar have said.

In software, Jfrog, a technology company that makes tools for developers, as well as cybersecurity firm McAfee have both hired underwriters.

"The market is still very selective around IPOs," said Daniel Burton-Morgan, Bank of America Corp's head of UK ECM. "But companies are starting to perform a bit better, so activity will resume."

Companies may hurry to sell shares in the beginning of 2020 before an expected rise in market volatility in the final months leading up to November's US presidential election.

"The perception is positive for the first part of the year, driven by the belief that President Trump will do everything he can to stimulate consumer spending ahead of the election," said Kristin DeClark, co-head of the US ECM practice at Barclays. BLOOMBERG