The number of flotations seen in recent years has been at record lows. Some have blamed the economy while others say the structure of the market needs to change.
Why is the IPO market so far below its peak?
Since 2008, IPO numbers have been sharply down due to a number of factors. The financial crisis sapped market confidence and in the aftermath most businesses were primarily focused on ensuring they could survive, rather than preparing for an IPO that could result in a significant undervaluation.
At the same time, private equity funds that were one of the main providers of new listing to the stock market when exiting their portfolio companies, were suddenly starved of the debt they needed to make deals. This has had a knock-on effect, meaning in the years since the crisis there has been a very slow recovery in IPO numbers as many businesses were simply unable to access the debt they needed to grow to the point where listing on the stock market made sense.
What is being done to help the market recover?
Many initiatives are currently in development to help encourage more firms to seek a public listing. Stock exchanges have been particularly keen to foster a greater number of IPOs as they represent a vital revenue stream for them. With volumes remaining somewhat depressed, exchange groups need new listings not only for the fees they receive but also to boost activity on their markets. To this end, the Federation of European Stock Exchanges has launched an IPO taskforce to advise the European Commission on steps it should take to boost the IPO market. While the task force has yet to set out its recommendations, key topics are likely to include easing the reporting burden of listed companies and further developing special markets designed for SMEs.
FIX Trading Community is also looking at IPOs from a more technical perspective. Its buy-side panel wants to see the IPO process become more automated, enabling traders to fit IPOs into their workflows, which are largely automated, more easily. However, there are a number of major barriers from both book runners and exchanges that currently prevent this.
What is the current status of the IPO market?
While growth has been slow, there have been positive signs that IPOs are beginning to come back. With debt finance becoming increasingly difficult to acquire as Basel III imposes tough new capital requirements on banks, more firms are expected to seek funding in other ways, including raising equity capital on the stock market.
London Stock Exchange reported last month that it had seen a six-year high in IPO numbers over the last 12 months and several major listings have gone down well with investors, including the recent listing of online takeaway service Just Eat, which floated at the top of its price range at £1.47 billion. With many developed economies starting to perform well again and memories of the Eurozone crisis fading, IPOs could be on a long-term upward trajectory.