Per definition, IPOs are stocks issued by a formerly privately owned company that is going public, which means they are selling stock to the public for the first time.
Why open that door? Because it is an opportunity for firms to raise additional capital and accelerate growth, but not only that.
An IPO is also one of the exit strategies for existing owners (including company founders and VCs) by allowing them to “cash out”.
When Should It Be Done?
It is challenging to know the right time to go public. This can differ from company to company. However, there are a few characteristics of an IPO-ready company:
- Impressive management
- Ability to accurately forecast financial performance
- Timely audited financial statements using IPO-accepted accounting principles
- Realistic valuation expectations and a favourable IPO window
- Clear, strategic roadmap
The assessment of a company’s readiness to IPO is carried out at an early stage, 18-36 months before floating.
The steps to an IPO are challenging:
- The first step is to choose an investment bank which will help manage the float process and prepare the prospectus. A syndicate of underwriters (in Alibaba’s case, they appointed six investment banks and 29 sub-underwriters to market the deal and manage the risk associated with the float) guarantees, for a fee, that all issued shares will be sold;
- In a second step pre-IPO, the company files a registration statement with the authorities, for example, the SEC. The SEC then requires a cooling-off period in which they carry out due diligence;
- A preliminary prospectus, the Red Herring’ is put together;
- The prospectus is finalised with a revised price range based on the feedback from the pre-marketing period and road shows;
- Before the effective date, the offering price is set and shares are allocated to investors. The firm’s shares then begin trading on the stock exchange(s).
A Slow Year
IPO activity in 2016 declined compared with the previous year due to political and economic uncertainty.
In total, there were 1510 IPOs globally, which raised $161bn, compared to 2015’s 1800 IPOs that raised $216bn. The biggest IPO in 2016 was ZTO Express ($1.4bn). However, it was not a successful one as its share price has steadily been declining from $18.40 to $12.30.
One of the best IPOs was AveXis Inc., a clinical-stage gene therapy biotech company developing treatments for neurological genetic diseases, which rose more than 200% since its float. The trending sectors were technology, industrials and healthcare with offer sizes of about $12.7bn, $18.4bn and $13.5bn respectively.
Asia Pacific was the epicentre of global IPO activity, mainly driven by China, which saw 60% of IPOs and 54% of proceeds raised. EMEA ranked second and Americas third.
By deal volume, China leads the ranking, followed by the US, Australia, Japan and India. The top two exchanges were Hong Kong Stock Exchange (HKEx) and Shanghai Stock Exchange (SSE) with $25.2bn and $14.2bn raised.
IPO Prospects in 2017
With regards to the economic and political environment in 2016 (US presidential elections, the UK’s EU referendum result, Middle East tensions and EU migrant crisis), it seemed like many IPO candidates actually decided to go for 2017 instead. Deal volume in 2017 so far has gone up: from $16bn in Q1 2016 to $40bn in Q1 2017.
Equity markets are now at record highs, and volatility levels have fallen to extremely low levels. A healthy IPO pipeline for 2017 is also foretold by an increasing M&A, with a rise of M&A deals value from $878bn in Q1 2016 to Q1 $1.6trn 2017.
With a strong rebound in IPO activity in the US this year due to an economic upswing and despite continued uncertainty in Europe, investors will likely seek out opportunities. Asia Pacific, with China leading the way, will maintain its leading position in global IPOs.
Sectors to look at here are industrials, financials and technology. Given the continued positive economic climate, 2017 will offer a favourable IPO window.