7 minute read 11 Nov 2019
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Why IPO backlog grows as global IPO market slows further in Q3 2019

By

Paul Go

EY Global IPO Leader

Leads Chinese and multinational companies in client servicing domain. Heads Hong Kong real estate, hospitality and construction sector audit group.

7 minute read 11 Nov 2019

Deal numbers may be down, but average first-day returns and post-IPO performance continue to rise.

The backlog of high-quality IPOs continues to grow as issuers wait for more favorable market conditions. IPO activity has fallen across many markets in Q3 2019 compared with Q3 2018. Overall, 256 IPOs came to the market in Q3 2019 with total proceeds of US$40.2b, a decrease of 24% by volume and 22% by proceeds compared with Q3 2018.

Although deal numbers were down, average first-day returns on the main markets were 27% and average current post-IPO performance was 32% higher.

Post-IPO performance

32%

Average increase in current post-IPO performance.

Technology, health care and industrials saw the largest share of IPOs in YTD 2019, together accounting for 407 IPOs (53% of global IPOs by deal volume) and raising a combined US$69.4b (61% of global proceeds).

Technology continued to be the strongest sector by deal numbers and proceeds in YTD 2019, representing 23% of global deal volume (179 IPOs) and 36% of proceeds (US$41.5b). In Q3 2019, technology was also the strongest sector by deal numbers and proceeds and saw 59 IPOs (23% of global IPOs by deal volume) which raised US$11.4b (28% of global proceeds).

As we enter the traditional peak IPO season, we expect global IPO activity to pick up in the last quarter and into 2020 when there is more clarity to US-China trade tensions and developments around Brexit.

Americas IPO markets impacted by quiet third quarter and equity market volatility

On a quarterly basis, the Americas completed 47 IPOs that raised US$11.9b in Q3 2019. This represents a drop of 30% by deal volume and 10% by proceeds from Q3 2018. Both YTD 2019 IPO deal volume and proceeds also fell behind compared with the same period in 2018, with 160 IPOs in the first nine months of 2019 (a decline of 22%) and US$46.9b in proceeds (a decline of 9%).

While IPO activity slowed in Q3 2019, the momentum from Q2 2019 endures. Geopolitical uncertainty continues to play a role. However, we anticipate any increase in volatility to be temporary.
Jackie Kelley,
EY Americas IPO Leader

US exchanges accounted for the majority of IPOs in the Americas region — 79% by number of deals and 95% by proceeds YTD in 2019. This was driven by several high-profile technology unicorns that have gone public so far this year. The NASDAQ and NYSE ranked first and second respectively by proceeds globally in YTD 2019.

As Jackie Kelley, EY Americas IPO Leader, explained: “While IPO activity slowed in Q3 2019, the momentum from Q2 2019 endures. Geopolitical uncertainty continues to play a role. However, we anticipate any increase in volatility to be temporary.”

Historically, Q3 has always been a quiet quarter. We expect that activity will pick up in Q4 2019.

The NASDAQ and NYSE ranked first and second respectively by proceeds globally in YTD 2019.

Muted Asia-Pacific IPO activity lifted by Shanghai’s STAR Market

In Asia-Pacific, YTD 2019 IPO volume was down 9% (436 IPOs) and proceeds decreased by 27% (US$46.1b) compared to the same period in 2018.

The launch of Shanghai’s STAR Market offset more muted activities in Hong Kong, Japan and Australia in Q3 2019, with Asia-Pacific exchanges seeing a decline of 2% by deal volumes (173 IPOs) and 29% by proceeds (US$23.7b) in Q3 2019 compared to Q3 2018. However, ongoing trade tensions between China and the US continue to impact IPO activity across parts of the region.

Still, Asia-Pacific continued to dominate global IPO activity in Q3 2019, representing seven of the top 10 exchanges by volumes and five of the top 10 exchanges by proceeds. Average first-day returns for IPOs on Asia-Pacific’s main markets rose to 51%, while average current returns soared to 71%, predominantly because of Shanghai’s STAR Market activity.

Ringo Choi EY Asia-Pacific IPO Leader, highlights that: The much-anticipated debut of Shanghai’s STAR Market in Q3 2019 did not disappoint as initial activity on the new exchange overshadowed more muted performance in other Asia-Pacific regions.”

Asia-Pacific continued to dominate global IPO activity in Q3 2019, representing seven of the top 10 exchanges by volumes and five of the top 10 exchanges by proceeds.

Japan saw a quiet quarter for IPO activity, with deal volume declining 57% (12 IPOs) and proceeds dropping 74% (US$488m in total) versus Q3 2018. In Southeast Asia, performance rebounded considerably as the region saw 40 IPOs come to market with proceeds of US$2.9b. Southeast Asian exchanges saw 48% higher deal numbers and 555% higher proceeds during Q3 2019 compared with Q3 2018 (27 IPOs and US$440m in proceeds).

The much-anticipated debut of Shanghai’s STAR Market in Q3 2019 did not disappoint as initial activity on the new exchange overshadowed more muted performance in other Asia-Pacific regions.
Ringo Choi,
EY Asia-Pacific IPO Leader

Going forward, the China-US trade tensions may continue to raise uncertainty among investors in some parts of the region. The Asia-Pacific IPO market will soon recover if mega IPOs can complete their listings promptly during the last quarter of the year.

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EMEIA continues to face geopolitical headwinds

In EMEIA, deal volumes and proceeds were down from YTD 2018 with EMEIA exchanges posting 172 IPOs (a decline of 52%) and raising a total of US$21.1b (also a decline of 41%). Ongoing US-EU-China trade tensions have dampened both market sentiment and the economic outlook in EMEIA. At the same time, with no deal in sight, Europe and UK are bracing for the risk of a hard Brexit in Q4 2019.

Despite these challenges, EMEIA accounted for three of the top 10 exchanges globally by proceeds in Q3 2019 (Deutsche Börse with US$1.7b from 1 IPO, NASDAQ OMX with US$1.3b from three IPOs and India’s National and Bombay Exchanges with US$858m from nine IPOs). Cross-border IPO activity increased slightly to 10% in YTD 2019 from 9% in 2018.

Additionally, investor sentiment and appetite for IPOs could improve in Q4 2019 due to a longer than expected low interest rate environment and supportive monetary policy. As Dr. Martin Steinbach, EY EMEIA IPO Leader, says, “The region continued to face headwinds from ongoing US-China-EU trade issues and Brexit uncertainty. IPO activity is expected to pick up as we head into the most active IPO quarter.”

The region continued to face headwinds from ongoing US-China-EU trade issues and Brexit uncertainty. IPO activity is expected to pick up as we head into the most active IPO quarter.
Dr. Martin Steinbach,
EY EMEIA IPO Leader

As we move into the final quarter of 2019, we will likely see EMEIA IPO issuers accelerate their IPO plans to get ahead of potential slower economic growth.

A growing IPO backlog demonstrates ongoing appetite, but there is a ‘wait-and-see’ feel in the air

The outlook for the global IPO activity is clouded by the US-China-EU trade issues, Brexit and social disruption in Hong Kong, all of which are impacting global capital markets. Once there is more clarity around these marketuncertainties, we expect a flood of IPOs will come to the market.

IPO candidates that are prepared and are determined to press ahead in Q4 2019 may have to accept lower valuations in line with recent stock market performance. We may also see some IPO candidates choose to seek alternate fundraising routes that offer higher valuations.

In either case, the outlook for Q4 2019 has a “wait-and-see” feel as IPO candidates assess which way the wind blows.

Summary

As the markets remain volatile and more IPO issuers wait for the better market sentiments, the backlog of high-quality IPO candidates continued to grow in Q3 2019. IPO candidates waiting for the tides to flow will face stiff competition from other issuers once the floodgates open. Therefore, it is more important than ever that IPO candidates prepare early and thoroughly and remain flexible to catch the right transaction window when it opens.

About this article

By

Paul Go

EY Global IPO Leader

Leads Chinese and multinational companies in client servicing domain. Heads Hong Kong real estate, hospitality and construction sector audit group.