Klaus Schinkel, Head of Germany, Edison Group
The number of company listings and total funds raised fell sharply during the first half of 2022 from a year earlier as inflation, rising interest rates and the conflict in Ukraine fully took hold, prompting companies to sit on their hands and ride out this period of uncertainty and wait for investors to show greater appetite.
That appetite has been largely absent for the past year, during which sliding share prices post-listing have been an unfortunate feature. Most of last year’s the initial public offerings (IPOs) are now trading below their listing price.
Research by Edison Group found that, as of 2 May 2022, the companies that listed in London last year had delivered a return of just 6% overall, with 49% trading below their listing price. Those on Euronext were trading down 19%, with 87% trading below their listing price. On Nasdaq they were trading down 15%, with 62% below their listing price.[1]
Some of the higher profile plunges include India’s Paytm, a fintech firm, which dropped 40% in its first two days of trading, China’s transportation platform Didi Chuxing, also down 40%, and the UK’s Deliveroo, down 26%.
The performance of last year’s listings didn’t augur well for 2022. The value of listings in the US and Europe was down 90% in the year to the end of May, due primarily to the Russian invasion of Ukraine, inflation that’s now at 40-year highs, and rising interest rates. The uncertainty prompted many businesses to put their listings on hold.
According to Dealogic[2], 157 companies in the US and Europe listed and raised a total of $17.9 billion in the first five months, well down from 628 listings that raised $192 billion in the same period last year.
Globally, the value of IPOs has seen a dramatic fall, dropping 71% to $81 billion from $283 billion during the January-May period, while the number of listings slumped to 596 from 1,237 a year earlier.
In perhaps a sign of the times, in spite of travel bans and tens of millions enduring extended city lockdowns – including in both Shanghai and Shenzhen – China managed a 7% rise to $35 billion in IPO fundraising during the first five months from a year earlier, compared to just $16 billion in the US.[3]
It is possible that Chinese investors have a greater appetite than their Western peers, but market conditions still come into play. Last year, these conditions turned bearish for reasons highlighted above. What’s clear is that this goes a long way towards determining investor interest in future listings and, by extension, the issue price.
Listing bellyflops cause reputational damage
It is the accepted practise that a firm looking to IPO, the lead manager organises roadshows to help work existing investor relationships – primarily institutional investors – which is valuable for when setting the price. Besides a successful completion of the IPO, the aftermarket performance of the newly listed share is also very important. That said, for issuers for the price to fall post- IPO is not only embarrassing; it causes reputational harm and can make borrowing more difficult in the future. For the bookrunner, it’s not a good look – they won’t what to develop a reputation for failure to optimise the issue price, be it too high or too low.
There’s no need for direct listing companies to undertake roadshows beforehand because the trading price is set by free-market pricing dynamics. The usual market dynamics of supply and demand play a key part. But many of these companies will hold an Investor Day to address investor concerns and to present their business vision and fundamentals.
However, with investor days, the nature of the information shared tends to be more limited, while shareholder interaction is less intimate. It means the company needs to work on investor development. Often institutional investors are involved that have established processes and sector knowledge. But that does not preclude the need for strong investor relations team.
Failure to do so exposes the direct listing company to being less able to curate their stockholder base to comprise mostly desirable investors. It means that without careful advance planning with potential preferred investors, the stock can end up in the hands of shareholders who may not be stable long-term custodians and may seek to rock the boat.
For a successful listing, the need for effective communication with investors is paramount, especially now when the markets are in such a state of flux. As the market landscape changes, companies must commit to providing research and insight on the business to help investors understand it. With knowledge and understanding comes confidence and, possibly, a willingness to invest further.
[1] Revisiting IPOs in London, Edison (11 May 2022)
[2] Value of US and European IPOs tumbles 90% this year, Financial Times (5 June 2022)
[3] China IPO fundraising doubles US total to top global ranks, Financial Times (20 June 2022)
