5 minute read 21 Apr 2020
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COVID-19 brings London IPOs to a halt

By

EY UK

Multidisciplinary professional services organisation

5 minute read 21 Apr 2020

A promising two months followed by the market closing abruptly

Following the election which returned a government with a clear mandate, the listing momentum that grew globally in late 2019 carried through to London in the first two months of 2020 and the London Stock Exchange witnessed five IPOs which raised some £615m in aggregate. However, the combined effects of COVID-19 and the oil price fall put an effective end to IPO activity before what should have been the busiest month of the quarter for listings.

The Main Market saw three IPOs which raised a combined £441m while the Alternative Investment Market saw two admissions in the quarter raising £174m. On a combined basis deal numbers are the same as Q1 2019 and proceeds are 28% up compared to prior year even though new listing activity effectively ceased at the end of February.

The largest IPO in the period was Calisen plc, an owner and manager of energy infrastructure assets, which raised £337m. The largest fundraising on AIM was Inspecs Group plc which raised £94m. Both issuers were private equity backed companies and between them raised some 70% of the funds raised in the quarter. In addition, in early March, FRP Advisory Group plc raised £80m, continuing a trend of professional services providers listing on the markets.

London once again demonstrated its depth of capital as it held its position as the number one listing location in Europe in terms of funds raised in the quarter, accounting for more than half of the total proceeds raised across Europe. All of the IPO activity in the quarter was conducted by domestic issuers. 

Main Market

£441m

The amount raised by Q1’s three floats on the Main Market

As it became clear that conditions were becoming more volatile, a number of IPO processes that were in train in late February were put on the back burner, but despite the turbulence in markets, Investec plc completed the demerger and dual listing of its global asset management business, Ninety One plc in early March.

… but other activity continues

Given the unprecedented circumstances, we are beginning to see the start of what we believe will be a run of issuers raising funds in the market with over £1b raised in the first two weeks of April.

The majority of funds raised so far have been by issuers placing new shares which represent less than 20% of the existing share capital thus potentially removing the need for a prospectus and associated process, allowing the fund raising to take place on an accelerated basis.

In addition, and recognising the unprecedented events, the Financial Conduct Authority (FCA) has provided temporary policy interventions and guidance including:

  • Giving guidance on working capital statements such that those issuers making unqualified working capital statements are temporarily allowed to disclose the COVID-19 related assumptions which form the basis of their “reasonable worst- case scenario”. This enables communication to investors of an issuer’s view of the impact of coronavirus on the business which has been taken into account in confirming that it has sufficient working capital.
  • Providing the ability for issuers to apply to the FCA for waivers to ensure that shareholder approval can be sought for certain transactions without the need to hold a general meeting given government guidelines on social distancing.
  • Reminding issuers of the need to consider the risk of any force majeure or material adverse change clauses in underwriting or facility agreements being triggered by COVID-19 related events before relying on the proceeds or facilities for working capital purposes.
  • Encouraging eligible issuers to make use of the new simplified prospectus, introduced by the Prospectus Regulation last year.

In addition to the above, a number of shareholder representative bodies have agreed steps to balance the pre-emption rights of existing shareholders with the need for these transactions to be done as efficiently as possible given the current economic environment.

Despite the COVID-19 crisis, the need for issuers to keep their investors informed still remains and we are also seeing an acceleration in the use of digital channels by issuers to communicate with investors and the market more widely.

COVID-19 has created the most turbulent market conditions since the financial crisis in 2008 impacting IPO activity in Q1.

Volatility

Since the end of February markets have experienced levels of volatility not seen since the 2008 crisis. To put this in context, the CBOE Volatility Index (VIX®) which represents the expected range of movement in the S&P 500 index over the next month, rose to all-time high of 82.69 on 16 March 2020, the highest level the index has reached since November 2008 when it hovered in a similar area. The ten year average has been much lower at 17.0.

Alternative Investment Market

£174m

The amount raised by two admissions to AIM in Q1

Global IPO activity

Globally, there were 230 IPOs raising proceeds of US$28b in the first quarter of 2020. This is a 9% increase in deal numbers and a 85% increase in proceeds compared to Q1 2019, reflecting the continuation of global IPO momentum that built up in the second half of 2019. As in Q1 2019, the technology, healthcare and industrials sectors were the most prolific producers of IPOs in the first quarter of 2020, together accounting for 115 IPOs (50% of global IPOs by deal numbers) and raising US$15.6b altogether (56% of global proceeds). By proceeds, industrials was the strongest sector with US$6.3b raised (22% of global proceeds). To find out more about the global IPO activity in this quarter visit our Global IPO Trends following the link here.

Looking forward — 2020

The London markets have experienced some of their most volatile trading conditions for some time with COVID-19 replacing Brexit and other geopolitical tensions as the primary factor impacting markets with an effective closure of the global IPO market for the time being.

Global economic activity is likely to be depressed until the virus epidemic is under control and governments can start to release some of the restrictions. Even then it will be a significant time before activity returns to anything like normal and the very earliest we can expect activity is the second half of the year — assuming the virus is brought under control rapidly.

Despite the backdrop, we are seeing companies continue to prepare to come to market, but plans are being put on the back burner as companies prioritise staff safety and cash preservation in the face of unprecedented challenges.

We anticipate that market activity, at least in the short term, is going to be focussed on fundraising activity by existing issuers as they attempt to shore up liquidity and replace any emergency funding.

Any companies coming to market are likely to be those that have successfully weathered the COVID-19 storm including those in the technology — or technology linked sectors that are less impacted by physical restrictions. Traditional businesses that have temporarily paused or restricted business will need to demonstrate a rapid recovery of trading, and all companies can expect investors to be discerning in the choices they make.

COVID-19 has had a pervasive impact on the IPO ecosystem, from financial markets to the real underlying economic fundamentals in Q1 2020. We see the impact on market volatility, equity indices and valuations continuing for the foreseeable future, with a recovery not practical until COVID-19 is under control. For the short term we expect most market activity to be focused on fund raising by existing issuers.
Scott McCubbin
EY UKI IPO Leader

Globally

Global markets have the same challenges as the UK and we can expect muted activity until the virus is under control. Provided there isn’t a second wave of infections in China, we can expect activity to commence in Asia-Pacific markets first before other markets start to open across the globe.

Globally we do see a pipeline of IPOs balanced between more traditional sectors and high tech, pharmaceutical and property management as companies continue with their plans to go public in 2020, but should the markets reopen in H2 2020 the pending US election may prove to be another distraction to the markets.

Summary

The combined effects of COVID-19 and the oil price fall put an effective end to IPO activity before what should have been the busiest month of the quarter for listings.

Q1 saw five IPOs, collectively raising £615m. The largest were Calisen plc (Main Market) and Inspecs plc (Alternative Investment Market).

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By

EY UK

Multidisciplinary professional services organisation