Initial Public Offerings, or IPOs, provide a good insight into the health of the share market. When times are good, companies line up to join the market, raising funds to expand their operations. When times are leaner, raisings become more difficult, and the number of new entrants drops away.
In the first half of 2023, only 12 companies have completed IPOs onto the ASX, well down on the 60 that did so in the same corresponding period last year. Making matters worse is the fact that there are only another dozen listed for debut in the second half of the year. I suspect there are a number getting their documents in order, with the decision to proceed in the hands of the brokers.
The real question is whether this is a structural change or is the tide about to turn with an influx of new entrants?
Whilst the quantum of new IPOs varies by year, in general, there are two peaks through the year for new listings, with Q4 generally having the most IPOs followed by Q2. This played out in 2018 through to 2021, essentially aligning with the time needed to complete documentation and the requirement for accounts to be updated. This has naturally resulted in a cyclical pattern through the year.
In 2021, there were 204 new listings on the ASX, raising A$13.4 billion. Fast forward to 2022 and there were only 89 listings, raising a much more restrained A$1.1 billion.
Something definitely changed in 2022, most notably an increase in inflation, the war in Ukraine and increased market volatility. After peaking at 34 new listings in Q2 2022, the trend has been downwards, with 13, 16, 9 and 3 IPOs in the four quarters since then. Thank goodness for the resources sector, with 71% of these newer IPOs in the commodities sector.
For those who have listed on the ASX in the past 12 months, the ride has been pretty wild. At one end of the spectrum, Patriot Battery Metals (PMT) is up 190% since listing, while at the other end, Nightingale Intelligent Systems Inc (NGL) is down 83% in just over 6 months on the boards.
The situation is not just specific to the ASX. EY reported that in the first quarter of 2023, global IPO volumes fell 8%, with proceeds down by 61% YOY. Q1 was another down period amid interest rate rises, a lukewarm stock market, entrenched inflation, and unexpected global banking industry turbulence.
According to EY, technology companies, which have been a mainstay of IPO activity in recent years, experienced some sharp declines in valuations, and the turmoil in the crypto markets and global banking industry has not helped. While technology continued to lead in global IPO volume, four of the top 10 listings in Q1 2023 were in the energy sector.
Last week, Goldman Sachs reported that their research indicates a near-end to the soft market for IPOs. The GS IPO Issuance Barometer is a measure designed to assess the near-term future trends for IPOs. A level of 100 represents the median number of realised IPOs historically in a given month. After collapsing to a level of just 7 in September 2022, the latest reading of 93 has it well on the way back to ‘normal’.
Goldman Sachs notes that easing volatility in the market, reductions in inflation and an expected end to rate hikes in the US is leading more companies to start re-considering a new listing.
Interestingly, it may end up being M&A activity that sparks up the IPO market. There is a notion that limiting investor options leads to higher valuations. Higher valuations in turn will increase the attractiveness of the market and likely lead to the next wave of listings.
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