The first three quarters of 2023 have shown a notable shift in the global initial public offering (IPO) market. With a decline of 5% in IPO volumes and a decrease of 32% in proceeds year-over-year (YoY), investor appetite is changing. According to the newest EY Global IPO Trends report, factors such as tightening liquidity, evolving interest in emerging markets, and declining unicorn IPOs are reshaping the landscape.

Finance Magnates discussed the report's findings with the Global EY IPO Leader, George Chan. According to Chan, the decline in the number and value of IPOs was caused by regulatory factors, a decrease in investor confidence, and a decline in materials companies.

IPO Market Records a Decline in Q3, EY Report Finds

The global IPO scene witnessed 968 IPOs with a capital of $101.2 billion, marking a drop of 5% and 32% YoY. In the Asia-Pacific region, Mainland China's IPO market has slowed due to regulatory measures, while Hong Kong has seen less activity owing to higher interest rates and dwindling investor confidence.

Australia's IPO issuance has plummeted, especially in the materials sector. Although the US experienced a slight uptick in IPO numbers, Canada saw its IPO volume more than halve, mainly because of a drop in materials companies.

The decline in IPO proceeds is even more significant. The number of mega-deals has halved compared to last year, contributing to weaker post-IPO share price performance. Landmark IPOs from last year in sectors like energy and luxury cars have not been matched this year. The top IPOs for 2023 are only about half the size of 2022's largest offerings.

"As there were no mega Chinese Foreign Private Issuers (FPIs) returning from the US this year, both the average deal size and total deal value decreased," Chan commented in an interview with Finance Magnates. "In contrast, last year saw two blockbuster Chinese FPIs with proceeds of US$8.2b and US$5.1b, respectively, delisted from the US and re-joined the A-share market."

Markets in the Middle East, particularly Saudi Arabia and the UAE, showed reduced IPO activity compared to when energy prices were high last year.

Better Perspectives in Emerging Markets

Despite these setbacks, Q3 brought signs of improved post-IPO share performance. The market is currently influenced by a variety of elements, including robust activity in emerging markets and a more restrained China IPO sector.

Over the past decade, emerging markets have seen an increase of more than 30% in IPO numbers and proceeds, primarily due to faster economic growth compared to developed nations. In 2023 alone, these markets accounted for 77% of the global share by number and 75% by value. New entrants like Turkey and Romania are joining the already active markets like Indonesia, Malaysia, and India.

"Turkish stock buyers are flocking to new share offerings, driven by the potential for substantial returns and the need to safeguard against rising inflation," Chan commented. Around 40 companies have gone public recently, all of which have yielded impressive returns in the after-market.

The IPO activity surge is driven by investor demand and smaller companies seeking alternative financing channels in light of Turkey's credit tightening.

"This trend mirrors patterns observed in other high-inflation countries with weakened currencies and could potentially continue to attract new entrants, provided the country's fiscal backdrop remains unchanged," the Global EY IPO Leader added.

Romania also marked a significant milestone with the $2 billion IPO of a state-owned renewable energy company in July, making it the largest-ever listing in the country. This listing has boosted the liquidity and investor interest in the Bucharest Stock Exchange and highlighted the company's strong EBITDA margin and focus on green energy.

Three Sectors Dominate IPO Activity

The technology sector is still a major player in the 2023 IPO landscape, although its proceeds would decline if blockbuster chip designer IPOs were excluded. Meanwhile, industrials have solidly secured the second spot. Unicorn IPOs, particularly in growth sectors like technology and health, have seen a massive decline of more than 80% in both volume and proceeds.

"Software, semiconductor, and electronics are the top 3 IPO sub-sectors that have dominated the IPO issuance in the technology sector for over a decade," Chan revealed.

While most sub-sectors declined within the technology sector in a YoY comparison, the electronics sub-sector demonstrated growth in deal number and value, with companies involved in diverse electronic component production and distribution aspects.

Regional Performance

The Americas region has shown an increase of 159% in proceeds, with the US contributing the most. For example, in 2022, 70% of the largest global IPOs took place on Nasdaq. However, Special Purpose Acquisition Company IPOs are at a seven-year low, signaling a shift in market focus.

"In the context of the 159% growth rate in IPO proceeds in the Americas, the US has experienced an increase of over 160%, while Canada has a decrease of over 40%. The surge in the US IPO proceeds is primarily attributable to the three large technology IPOs listed in September, along with a mega consumer product carve-out in May," Chan added.

Despite holding nearly 60% of the global market share, Asia-Pacific has seen a YOY decrease of 8% and 41% in IPO volume and proceeds, respectively. Yet, optimism remains for large deals in the pipeline. In addition, With 286 IPOs and $21.9 billion raised, EMEIA markets have adapted well to tighter financial conditions. There's a rising trend in the energy sector and ESG-related IPOs.

What the Future Holds

The global IPO market is in flux, influenced by various economic and sectoral factors. Investors are increasingly looking for value over growth, a trend likely to continue given the current economic conditions. Companies looking to go public will need to be agile, financially healthy, and open to technological advancements to succeed in this evolving landscape.

"Investors are now focusing on companies with strong fundamentals due to tighter liquidity and higher capital costs," Chan commented.

The change from an era of "cheap money" to a setting of sustained higher interest rates is causing investors to adjust their investment strategies. The focus has shifted towards high-quality IPO opportunities that offer compelling equity narratives, strong management teams, and the potential for long-term growth and value creation. Investors are now more selective, prioritizing companies that demonstrate sustainable profitability.

In tune with the evolving investment landscape, several high-profile companies have indicated their plans to go public, effectively serving as a barometer for investor appetite in the European and US markets. As Chan forecasted, these companies' movements are closely watched as they could trigger the next wave of IPOs and provide valuable insights into market valuations and demand.