Spooked investors meant there was a soft market for new entrants to the London Stock Exchange in 2022, according to experts, and there is little sign of things improving this year.
After a bumper year for new placings in 2021, the past 12 months were relatively underwhelming for investors hoping to buy into new trends. In total, there were 42 new listings on the London Stock Exchange, but only two raised more than £300m, according to data from AJ Bell.
Chinese wind turbine manufacturer Ming Yang was the largest initial public offering (IPO) of the year, raising £546m, while Ithaca Energy managed to raise £300m.
The amount of cash raised through new launches dropped 94% year-on-year, with Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, noting this was largely because of the “spooked investor base”.
“As it became apparent that interest rates were on a steep march upwards, there was little appetite for unproven stock stories,” she said.
Instead, investors focused on companies with strong balance sheets that had weathered storms before and that could handle the shifting environment.
Lund-Yates said it was a poor time to be coming to market and that achieving desired valuations was a tough ask. She warned the likelihood is that the IPO market will “continue to struggle” and highlighted the technology sector, where investors “have a tendency to become overexcited” and value them on sentiment rather than fundamentals, as one that may look particularly sparse.
“This is a dangerous precedent and until it’s tempered could see the number of tech IPOs limited,” she said.
Rupert Krefting, head of corporate finance and stewardship at M&G Investments, highlighted a similar point, noting that semiconductor business Sondrel was one of the few where the current share price exceeds the issue price, rising 11% from issue, while some of the other larger issues such as Ithaca Energy, Clean Power Hydrogen and First Tin all fell by double digits, as the below chart shows.
Source: AJ Bell, London Stock Exchange
“Looking ahead to 2023, perhaps the main lesson from the last two years is for more realistic pricing from vendors when it comes to improving post-IPO performance,” he said.
In terms of the IPO market this year, some could argue that the poor pipeline of IPOs in 2022 means that the coming 12 months could be a bumper year.
Dan Green, lead manager on the FTF Martin Currie UK Smaller Companies fund, said a “subdued year” has, in the recent past at least, preceded a strong year for IPOs as companies that are ready and wanting to list choose to wait until market conditions and sentiment improve.
“This was seen in 2016 when companies wanting to list delayed their plans after the Brexit referendum vote, with 2017 being a strong year for IPOs and more recently the pandemic in 2020 meant many companies delayed their plans with 2021 proving to be a bumper year,” he said.
While it is possible there will be a rash of new market listings in 2023, the fund manager noted he has not been invited to many “early looks”, which is typically when companies meet fund managers to gauge their interest in investing should they list.
“If we do see a number of companies wanting to list, I think it will be in the second half of the year as companies wait for signs of confidence to return to the market and valuations reducing from their current discounts to long-term averages for smaller companies,” he said.
New issues are vital for fund managers, particularly those that invest in smaller companies, as they replace others that have been delisted through mergers and acquisitions. Last year, 17 benchmark companies in the Numis Smaller Companies index, Green noted.
Lund-Yates, however, said investors may have to wait for a while yet before the market picks up as “we aren’t quite in a situation where the environment feels fit enough to nurture lots of brand new entrants”.