An initial public offering (IPO) represents a crucial transition for a private company, involving the issuance of shares to the public for the first time. This process enables companies to raise capital on public stock exchanges, serving as a strategic exit for founders, early investors and private equity managers to realise returns on their investments.
This article examines the global IPO market’s recovery following the challenging macroeconomic conditions of 2023, with a focus on geographical variations, the dominant position of the United States, the crisis facing the London Stock Exchange, and the outlook for IPOs through the remainder of 2024.
Global IPOs in 2023
In 2023, the global IPO market faced significant headwinds due to adverse macroeconomic conditions. The origins of these conditions were a combination of inflationary pressure from geopolitical supply chain disruptions and subsequent monetary policy tightening by central banks, which caused hikes to interest rates. These factors constrained liquidity, heightened investor caution and substantially suppressed IPO activity. As a result, global deal values plummeted to six-year lows with the number of global IPOs declining by 16% to 1334 transactions.
The impact of these macroeconomic challenges is evident. Recent analysis from White & Case's ‘Global IPO Deal Value, 2017-2023’ illustrates a precipitous decline in proceeds, which fell 30% year-on-year to $120.05 billion USD. A nuanced geographical analysis reveals that Brazil, the largest economy in Latin America, posted its second consecutive year without recording any IPOs. Similarly, China’s struggling real estate sector exacerbated broader economic difficulties in the region, greatly inhibiting IPO activity.
While global macroeconomic challenges do influence IPO activity, other factors such as arduous listing rules in specific markets make certain geographical locations increasingly unattractive to potential IPO candidates too.
The London Stock Exchange
The London Stock Exchange (LSE) offers a quintessential case study to assess these looming long-term challenges.
Beyond the macroeconomic challenges of 2023, a significant long-term obstacle for the LSE has been the gradual decline of institutional investment in UK equities. Data reported by the Office for National Statistics (ONS) tracks how, in 1997, insurance and pension funds held 45.7% of UK-listed shares. However, by the end of 2022, this fell to 4.2%.
This is a significant long-term obstacle because institutional investors, such as insurance and pension funds, provide substantial liquidity to markets. Thus, their significantly reduced participation implies lower trading volumes, which in turn increases market volatility. The spill-over effect of this decline raises questions around reduced market confidence and lower valuations as London-listed companies find it difficult to raise capital on favourable terms due to reduced demand for their shares.
Despite this, there are some promising developments. On 11 June, shares in British microcomputer manufacturer, Raspberry Pi, jumped by more than a third on its first day of trading in ‘conditional dealing’. Conditional dealing is only open to institutional shareholders, providing a boost for the UK stock market in spite of its difficulties. However, we are yet to see whether Raspberry Pi is an outlier or whether this listing indicates a trend reversal for high-growth tech companies who have increasingly opted for listings in New York over recent years.
From a regulatory perspective, onerous listing rules pose an equally serious challenge to the LSE’s positioning as a leading global financial centre. In an attempt to address this, the UK’s Financial Conduct Authority (FCA) is implementing a series of reforms aimed at streamlining the eligibility requirements for IPO candidates.
Currently, dual class share structures, which allow companies to issue multiple classes of shares with different voting rights, are prohibited on the LSE. This restriction places founders and executives at the mercy of short-term investors focused on achieving immediate returns. This makes long-term strategic planning more challenging. Moreover, the FCA’s upcoming reforms will eliminate the requirement for shareholder approval for significant M&A transactions, thereby removing potential barriers to corporate growth. By integrating these strategic insights, the LSE can position itself more competitively in the global market, thereby ensuring sustained growth and resilience in an evolving financial landscape.
Julia Hoggett, Chief Executive of the London Stock Exchange, has described these incoming reforms as ‘the biggest rewrites of the UK’s primary market rules in 40 years’. By easing regulatory constraints and accelerating the listing process , the objective is to enhance the appeal of a London IPO listing, with companies such as Waterstones, Boots and Zopa considered potential candidates once the new listing rules are introduced.
Without such crucial reform, London risks relegation to ‘a relatively regional parochial stock exchange and financial centre’ as analysis by Mark Austin, Corporate Partner at Latham & Watkins and former Chair of the Listing Authority Advisory Panel, highlights. This urgency is further underscored by Peel Hunt’s analysis, predicting a potential disappearance of the FTSE SmallCap index by 2028 if current trends continue.
Global IPOs in 2024
Six months into 2024, the global outlook for IPOs is improving as interest rates stabilise and inflation returns to more normalised levels, with the second half of 2024 poised to witness an uptick in IPO activity.
A market overview from White & Case highlights that new IPO issuances will be driven by the growing pressure on private equity managers to realise exits and make distributions to investors after a sluggish 2023. This is underscored by the fact that private equity buyout funds are sitting on approximately $2.8 trillion USD worth of unsold equities, a figure more than four times the levels observed during the 2008 financial crisis. Consequently, as the demand for private equity exits intensify, IPOs will become a pivotal strategy for freeing up portfolios.
IPOs can provide a highly effective exit strategy for private equity investors, offering the potential for significant returns, liquidity, and strategic advantages. However, much of this success is contingent on favourable market conditions.
The United States has emerged as a key market for the 2024 IPO resurgence, exemplified by the landmark IPO of Reddit on the New York Stock Exchange (NYSE) in March, which priced at the top end of its range and demonstrated robust initial trading performance. Furthermore, the decision of Cambridge-based ARM Holdings to list on NASDAQ in September 2023 outlines the global appeal of the United States for cross-border listings, despite the challenging macroeconomic conditions of 2023.
Within the broader IPO uptick, the technology sector, particularly in areas such as computers, electronics, and biotechnology, is anticipated to lead market activity in the second half of 2024. Globally, investors have demonstrated strong support for chipmakers, who manufacture the hardware essential for powering AI tools, as evidenced by the gains of companies like Nvidia and ARM Holdings.
Activist investors are increasingly urging British businesses to abandon a London listing in favour of New York too, highlighting the urgency for the LSE to enhance its attractiveness. The United States offers deeper liquidity and more favourable initial valuations. For instance, S&P 500 companies trade at approximately twenty-one times forward twelve-month price-to-earnings ratios, whereas FTSE100 firms are valued at just over half of that, with valuations trending ever lower in a post-Brexit Britain. Additionally, the US market offers superior management compensation packages and fewer restrictions on directors owning shares. This context amplifies the necessity for the LSE to simplify its listing rules to attract growth companies to London, or risk further losing out to other markets around the world, primarily the United States.
Conclusions
This analysis of the global IPO market underscores the profound impact of macroeconomic conditions on IPO activities and highlights the need for strategic regulatory reforms. The FCA’s upcoming reforms aim to streamline the listing process and attract more IPO candidates to London. Having proactive regulatory frameworks are essential to ensuring that capital markets remain robust, competitive, and capable of supporting sustainable growth and innovation in an evolving global landscape.
Finally, the outlook for IPOs in the latter half of 2024 is promising, with stabilising economic conditions expected to drive increased activity. The demand for private equity exits and strong performance of tech sector IPOs in the United States suggest a potential rebound in IPO volumes too.
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