HSF ECM Review 2023: The tide is turning for Australian Capital Markets

While 2023 was another quiet year for Australia’s initial public offerings (IPO), the tide could now be turning, with a slew of large capital raisings in the second half of 2023 and the resources sector leading the way, according to a new report from global law firm Herbert Smith Freehills (HSF).

The report — Turning Tides: The Australian ECM Review 2023 — reflects on 2023, where muted activity in global IPO markets continued and the Australian market retracted further from the numbers seen in 2022, however the year ended positively with a large IPO by Redox and secondary raisings by Orora and Treasury Wine Estates. 

The report now adopts a broader scope than previous years, assessing capital markets activity more generally and analysing data both on IPOs and secondary raisings.

IPO activity 

In 2023, the number of IPOs was down for a second year in a row, with only 32 across the year. However, the report suggests that several large IPOs and secondary raises emerging in mid/late-2023 have provided a sense of cautious optimism for 2024. 

HSF partner and Joint Global Head of Capital Markets Philippa Stone explained, “2023 was a quiet year for Australian IPOs, continuing the dynamic experienced in 2022 after the post-Covid-19 highs of 2021. 

“In a continuation of what we observed in our 2022 report, Australian IPO activity was affected by global conditions, including rising inflation, interest rates and market volatility. These factors led to reduced investor confidence and affected the level of IPO activity. 

“There is no doubt that companies otherwise considering IPOs are conscious of these factors, and are in many cases awaiting more favourable market conditions, and greater stability around valuations, before launching a transaction.” 

Despite the generally lower activity, there were some bright spots in 2023, including the A$1.3 billion listing of chemicals distributor Redox Limited, on which Herbert Smith Freehills acted.

HSF partner Nicole Pedler said, “There was a strong uptick in the amount of capital raised in IPOs in the second half of 2023, which was multiples higher than in the first half. Much of this was attributable to the capital raised by Redox Limited in the middle of the year, which significantly boosted the total amount of capital raised in IPOs. 

“Whilst the balance of IPOs were typically those with a market capitalisation of less than A$50 million, the average market capitalisation for an IPO was still significantly higher in 2023, around 8 times higher than in 2022”, said Pedler.

Certain sectors did show resilience in the muted market of 2023. The report details that the materials and energy resources listings continue to play a significant role in Australian equity capital markets, comprising the majority of IPOs in 2023.

Pedler added, “Resources was clearly the dominant sector in 2023 with the materials and energy listings comprising 75% of IPOs. However, while they accounted for the vast majority of IPO activity in 2024 by number, resources company IPOs accounted for just under a third of the total capital raised by IPOs for the year given that most of the resources IPOs were by early stage exploration companies. Outliers from the resources sector were rare earth elements miners Brazilian Rare Earths Limited and VHM Limited.” 

“These listings reflect the ongoing strength of the ASX in attracting materials and energy sector companies to its boards and despite the recent volatility, and in some cases the reduction in price for commodities such as lithium and nickel, in 2024 we expect to see continued IPO activity for small and mid cap companies bringing new assets to public markets across all commodities, as well as further capital raisings by critical minerals companies as they race to build out supply to meet future demand expected due to the energy transition”. 

Another bright spot for Australian capital markets was enterprising issuers embracing innovative approaches to reach the ASX boards.

HSF partner Michael Ziegelaar said, “As Chemist Warehouse’s proposed reverse takeover of Sigma Healthcare Limited and Light & Wonder’s foreign exempt listing demonstrate, novel strategies became an option for enterprising management teams and issuers seeking the benefits of an ASX listing in 2023. This was particularly the case where there were benefits from achieving other commercial objectives in addition to a listing, as was the case for both Chemist Warehouse and Light & Wonder. 

“While the general expectation is for capital markets to rebound in 2024, the door is firmly open for others to take alternative routes to the ASX in appropriate circumstances”.

Secondary Raisings 

The data analysed in the report suggests that secondary markets were less affected by economic and geopolitical conditions, with approximately A$13.3 billion raised. 

In 2023, the combined placement and share purchase plan (SPP) was the most popular offer structure (42%), followed by the combined placement and rights issue (22%). 

“This is not surprising given both placements and accelerated rights issues allow issuers to raise a significant portion of the desired capital upfront”, said HSF partner Alex Mackinnon.

“Companies undertook secondary raises for various reasons, including business growth, balance sheet repair, and funding strategic initiatives. Raising to fund M&A occurred in 20% of cases”, added Mackinnon.

“These motives for raising may be reflective of the subdued market and somewhat subdued M&A activity, which is being driven by interest rate volatility and geopolitical factors. It may also indicate a desire by issuers to reduce debt in a higher interest rate environment. 

“In 2024, we expect the purpose of capital raisings to shift, with interest rate stabilisation likely to drive increased M&A activity and capital raisings being undertaken as a means to fund these acquisitions”.

Block trades 

While IPO activity in 2023 has been down, blocks of stock retained by vendors in past year IPOs have continued to come out of escrow, leading to healthy block trade activity. 

Philippa Stone explains, “The healthy block trade activity in the market is also an interesting point coming out of our data, given the otherwise slow year for IPOs — particularly for our private equity clients. As has been the case for some time, the market now expects exiting shareholders to keep a material interest in the success of the business post-float via escrow for a period of one to two years. 

“Perhaps most importantly, our analysis has shown that vendors have often managed to time and calibrate their exits to reap greater per-share rewards from post-IPO blocks than from the IPO itself. In fact, while private equity vendors are generally realising fewer shares as a percentage of their initial holdings at the time of IPO, they have often realised greater value overall, and have seen the value of their investments grow.

“Private equity and other forms of private capital, including sovereign wealth and pension funds, will continue to play significant roles in public market transactions, impacting the overall dynamics of the capital markets”.

Regulatory Developments

The report also analyses key developments from regulators in 2023, including the heightened focus from regulators on strategic priorities such as greenwashing, continuous disclosure and unfair contract terms. 

As HSF partner Philip Hart explains, “In 2023, ASIC ramped up its greenwashing enforcement activities, received a favourable decision from the Federal Court of Australia in its continuous disclosure case against ANZ, intervened in rights issues and conducted market surveillance. ASX concentrated on non-market standard convertible debt security terms, security purchase plan waivers, securityholder approval for the issue of securities under agreement and at the start of 2024, also made changes to its admission procedures.

“The much-anticipated unfair contract terms also took effect on 9 November 2023, which has important implications for the AFMA Master ECM Terms, as well as disclosure documents and secondary raising documents, which we explore in the report”. 

Predictions for 2024 

Looking further into 2024, HSF partner Tim McEwen forecasts that the tide might soon be turning. 

“Predicting the IPO market is always challenging, but we believe there's pent-up supply from vendors and founders, matched by pent-up demand from investors seeking new opportunities”, said McEwen.

“If the inflation and interest rate cycles start to ease as seems to generally be expected and geopolitical concerns subside, we expect that some of the larger and high profile predicted IPOs of the past few years will be dusted off, with a window for IPOs likely opening between September and November. 

“Australian capital markets have been a consistent source of capital for resources companies over the years – being accustomed to the cyclical and sometimes volatile nature of the commodity price cycle and being prepared to fund their exploration activities directed at finding the ‘next big thing’”. 

HSF is recognised as Australia’s leading law firm for IPOs and Equity deals by value, and we have acted on more ASX IPOs by number since 1998 than any other top tier law firm (LSEG Refinitiv).  
For more information or a copy of the report, please visit: https://www.herbertsmithfreehills.com/insights/reports/turning-tides-the-australian-ecm-review-2023