Changing seasons — Australia’s capital markets pivot back to basics

Australia’s initial public offering (IPO) market could reopen in mid-late 2023, with a significant number of companies ready to pull the IPO trigger, and it will pay for companies looking to float to be prepared, according to a new report from global law firm Herbert Smith Freehills.

The report — Australian IPO Review 2022: Changing Seasons — found that, consistent with global IPO markets, the Australian market retracted in 2022 from record highs achieved in 2021. There were less than half as many IPOs in 2022 compared to 2021, and the volume of funds raised tumbled dramatically, from over A$13 billion in 2021 to just over A$1 billion last year.

Herbert Smith Freehills partner and Joint Global Head of Capital Markets Philippa Stone explained, “Economic conditions in 2022 effectively inverted from 2021, with rising inflation and interest rates contributing to lower valuations and uncertainty, particularly for large capitalisation listings.

“Understandably, many companies that had been considering IPOs took a conservative approach in 2022, opting to wait for greater stability and visibility around inflation and interest rate movements.

“Given the large number of IPOs that have been put on hold, we expect IPO activity to return once market participants recover confidence. We hope, in the absence of further serious economic deterioration, which of course is a possibility, could be in mid-late calendar year 2023.”

The report advises that companies use the current quiet market conditions to prepare for when economic stability returns.

HSF partner Alex Mackinnon added, “When the IPO window reopens, it will pay for businesses looking to float to be prepared so that they can minimise the lead time on their IPO and hit the optimal window.

“Now is the time for these businesses to get their houses in order. Potential IPO candidates should prepare for their due diligence, consider how they will effectively market their IPO, and ensure their board and management team is IPO and listed life ready.”

HSF partner Philip Hart noted that, “Given the general market and investor interest in ESG matters, we expect that there will be heightened investor and regulatory scrutiny of statements highlighting green credentials in prospectuses. In light of this, due diligence needs to focus on the extent to which there is a reasonable basis for “green” claims in order to minimise the risk of greenwashing allegations.”

The report notes that despite the softening in the market last year, there were more IPOs in 2022 than in 2019 and 2020, signalling that the market has passed the extraordinary conditions brought about by the Covid-19 pandemic, and some issuers and investors are exhibiting greater comfort managing ‘ordinary’ economic cyclicality.

HSF partner Nicole Pedler explained, “Economic conditions in 2022 were borne out in the composition of IPOs coming to market, where we saw a continuation of old economy IPOs.

“One of the ASX’s core strengths has long been attracting smaller market capitalisation materials sector listings. This was certainly reflected in the numbers last year — consistent with 2021, most IPOs in 2022 came from the materials sector, which accounted for almost 70% of all listings. In addition, for the first time in several years, materials listings also accounted for the majority of total capital raised.”

The second largest sector by number of IPOs was the energy sector, representing a further 10% of listings, with the S&P/ASX 200 Energy Index experiencing growth of more than 30% in the calendar year of 2022.

“These trends reflect the increasing demand for gold and battery technology and components, the ongoing focus on energy transition as well as the energy supply shock which resulted from the war in Ukraine,” Ms Pedler added.

For 2023, the report predicts that economic stability will remain a concern and will impact companies’ approach to IPOs.

HSF partner Michael Ziegelaar said, “Given the current economic volatility, we expect that back-end bookbuilds will be more popular until economic stability returns, as they allow investors, particularly institutional investors, to reduce or manage the risk of price volatility between the determination of the offer price and the completion of the IPO. As economic conditions stabilise, we expect that front-end bookbuilds will regain popularity.

“Pre-IPO rounds will continue to play an important role in the evolution of businesses, especially given the lack of IPOs.”

In terms of the sectors where we should see IPOs this year, the report found that energy will continue to do well, whereas technology sector issuers may need to look at other avenues for raising capital.

HSF partner Tim McEwen shared, “With global energy shortages, supply issues and price rises, we expect that minerals companies, especially those who focus on lithium used in batteries, will be a leading source of IPOs in 2023.

“In light of the volatility of interest rates, the elasticity of tech share prices, and previous years of high private valuations of tech companies that have subsequently fallen, tech IPOs are likely to be harder to complete unless they have a clear path to profitability. This could result in tech companies becoming more reliant upon crowd-sourced funding and private equity.”

Additional findings of the report:

• While muted in comparison to previous years, financial and healthcare sector listings continued to come to market.
• The average capital raised per IPO declined significantly in 2022, consistent with the ASX playing to a core strength in attracting smaller market capitalisation materials listings.
• IPOs in 2022 had an average first day gain to their offer prices of 12%, down from 23% in 2021.
• Only 7% of IPOs were underwritten in 2022, a further drop from the already low 27% in 2021.
• The average 2022 IPO came to market with approximately 36% of its total outstanding securities in some form of escrow.

For more information or a copy of the report, you can find it here.