To call the markets in 2016 volatile is an understatement – the slowdown in China, Britain’s vote to leave the European Union and the US presidential campaign have all shaken markets around the world.
That volatility looks set to continue. As this report is published, the impact of Brexit on medium-term confidence in stock markets and investor willingness to back new issues remains to be seen. In the weeks following the referendum, the pound shifted from a US$1.50 high to below US$1.30, becoming the world’s worst performer. US equity values declined and then recovered, increasing to record levels, even as interest rates dropped and the US Federal Reserve hinted at interest rate increases to come.
All of this is occurring at a time when public markets have paused to digest some of the initial public offerings (IPOs) launched in 2014 and 2015. A significant number of IPOs from 2015 are also delivering disappointing returns. As of 20 August 2016, the average return for a 2015 IPO stock was -2%, according to Renaissance Capital data.
However, despite the turbulence, there is reason for hope for IPOs this year. According to Rennaissance, shares of firms that have gone public in 2016 are up on average by 35%. Further, the CBOE Volatility Index, a gauge for volatility in the market, is standing at a two-year low. And our exclusive survey of C-suite executives from 100 private companies around the world demonstrates that many companies are positioning themselves to launch an IPO when market conditions stabilise, either temporarily or for a more sustained period. The attraction of going public remains strong.
While there are some differences by region as to when the IPO window will re-open, over half (58%) of respondents believe that this will happen in the next 12 months. Many companies believe that an IPO is the best route to growth, an increased valuation and a raised public profile. They understand that they will need to move swiftly as the opportunity may not be there for long – IPO windows can shut just as quickly as they open.
Our survey shows that companies are taking steps to prepare for their IPO. These steps include ensuring that financial reporting is GAAP or IFRS compliant; their corporate governance practices are more like that of a public company; and that they have shown a solid quarter-on-quarter growth or otherwise developed a compelling value proposition. There is a backlog of companies that are waiting on the side-lines for the right opportunity.
Companies that haven’t begun preparing, or that aren’t at the right value inflection point in their lifecycle, may find it difficult to get into a positon where they can take advantage of a period of calm in a choppy market.
While some firms may be able to achieve their listing in volatile times, there is also a need to be flexible and pursue alternatives. Even if an IPO is the ultimate end goal, volatility requires companies to consider and prepare for alternative sources of capital such as private placement, private equity funding or, perhaps, to look for a merger partner. The companies most likely to succeed are those that not only expect the unexpected, but plan for it by being nimble and keeping their options open.
Reed Smith corporate partner and head of the US capital markets group, New York
Reed Smith corporate partner, London