Institutional investors feeling positive about 2013 IPO market
- Four-fold increase in IPO investors in last 12 months
- Majority of investors looking to domestic markets first
- Investor support PE/VC-backed IPOs varies by region
- Over-pricing is biggest perceived threat to a successful IPO
London, 21 February 2013 – A new Ernst & Young survey shows that institutional investors are increasingly positive about the IPO market. According to the more than 300 institutional investors surveyed in December, a vast majority - 82% - have invested in pre-IPO and IPO stocks in 2012 compared to only 18% in either 2010 or 2011. Going forward investors cite the prospect of a brighter corporate earnings outlook, an improving macro-economic environment and more stable equity markets as the key drivers of sustained positive market sentiment through 2013.
Commenting on the findings Gary Schweitzer, Capital Markets Partner and IPO Leader for Russia and the CIS, Ernst & Young says: “These results show the importance of increasing the involvement of institutional investors in the development of the Russian IPO market.”
Majority of investors are focused on domestic markets
So where are investors intending to place their bets? Mainly domestically – investors expect to favor investment in their home or regional markets for the next three years. This sentiment was particularly true of investors in North America where 89% are focusing investment in domestic listings. By contrast, European investors are most inclined to support listings outside their home region. At 41%, the percentage stating a preference to invest overseas is more than double that of those in the next most adventurous region – Africa and the Middle East. Very few (13%) of Asian investors are actively looking at opportunities overseas, while only 9% of Central and South American investors look outside their home region.
Investors perceive rapid growth markets as both more risky and more expensive with 72% of investors saying the risk is higher and 41% believing valuations are higher. Risk perceptions are strongest among North American investors. Gary explains: “This is another indication that in the short term at least, the Russian market may need to look to domestic investment to fuel IPO activity.”
Investors’ do not believe PE/VC-backed IPOs are less attractive
The popular perception that PE and VC-backed IPOs leave less value on the table for future investors appears to be a myth, according to the survey results. Investors have varied perceptions on the price of financial sponsor-backed IPOs versus other IPOs. Just over 40% of institutional investors believe they are more expensive, leaving around 60% who say that such IPOs are the same or cheaper, implying higher returns for new investors.
“The differences in regional perceptions regarding the value that PE/VC brings to IPOs are quite startling. Those in Central and South America are overwhelmingly positive – in direct contrast to other rapid growth regions – Africa and the Middle East.” In North America, the historic core of PE and the VC industry, expectations of a better price performance post listing are alarmingly low.” In North America only 19% of investors thought PE/VC stocks would perform better.
Financial services have universal appeal
The survey highlights that financial services is the industry with the highest appeal in every region. Overall, 51% of investors currently have it as one of the top three sectors in their portfolio. The next highest ranking sectors are consumer retail (35%), consumer products (27%), oil and gas (26%) and technology (21%).
“The attractiveness of financial services is consistent with what we are seeing in the Russian market as well,” says Gary.
Preparation is critical – IPOs need right team, right story and right price
Right price featured in 91% of investors’ top three critical factors influencing IPO success across all geographic regions and investor types. This was followed by the right story which was cited in the top three by 65% of investors and right team by 57%.
“The right price and the right story are two factors that are nearly always present in a successful IPO,” explains Gary. “Companies need to prepare and be ready when the window opens.”
Overpricing is the biggest threat to a successful IPO
Reflecting the importance of launching at the right price with the right management team, over-pricing ranks as the top challenge to IPO success, cited by 85% of investors, followed by having the wrong team (56%). Going public too early in the life cycle of the business is seen as the third most significant challenge (43%), often triggered by the need for capital or concerns to capitalize on what’s seen as a limited window of opportunity.
“Fortunately, the biggest threats to a successful IPO are all factors within the control of the company,” said Gary.
How investors view success as a public company?
Overwhelmingly, investors view success as a public company as dependent on three factors that outweigh all others by some margin: strong operational excellence (66%), fulfilling investors’ expectations (66%) and using IPO proceeds as planned (47%). “Pre-IPO companies make promises and investors will continuously match the company’s performance against those promises” says Gary. “Companies that do not deliver on the promises usually suffer a drop in market value.”
Through this year and 2014, the positive global outlook for IPO investment highlighted by the findings should be sustained.
In Russia, development of the IPO market over the next few years will depend heavily on the availability of investment money and the progress of the privatization program as well as the need or desire of private company shareholders to cash out or seek additional funding” said Gary.
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 About the Institutional Investor survey 2013
The survey was conducted in November and December 2012 online with 312 institutional investors around the world. Our goal was to determine what information institutional investors need or use most often, the factors that impact their buy or sell decisions and to which listing criteria they give most weight.