IPO market in 2022 and the outlook for 2023

It’s been a year to forget for companies seeking stock market listings, and those wanting to float in 2023 will have to be a certain type of business. Our City reporter explains.

Investors eyeing the return of IPO activity in 2023 can expect a different type of newcomer to many of the companies that made 2021 such a bumper year for new listings.

Those with resilient business models in profitability and cash flows are likely to be the first to test the IPO market should economic conditions allow later in the year.

Their success will be key to rebuilding confidence in new issues after a largely painful experience for investors whose involvement in the 2021 IPO boom has turned sour due to big falls in valuations for the likes of Deliveroo (LSE:ROO),Dr Martens (LSE:DOCS), and Moonpig (LSE:MOON).

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Investing is for the long term and many of these fallen stars are companies whose business models continue to attract positive comment in parts of the City.

But for now, it’s likely that backers of future new listings will be much more risk averse.

Weakened markets have drained the pipeline of new issues during 2022 but that means there should be a few companies waiting in the wings to revive their IPO plans in 2023.

Activity is certain to be quiet in the early of the year as those companies await clarity about whether inflation has peaked and central banks are done with raising interest rates.

Geopolitics and the severity of the incoming global recession also present reasons why the wait-and-see approach may continue for longer than many hope.

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But if conditions do improve, investors are likely to focus on a company’s fundamentals, such as revenue growth, profitability and cash flows, over just growth projections.

The correlation between share price performance and the communication of environmental, social and governance (ESG) strategies means investors will also be looking at a company’s sustainability record.

Paul Go, EY’s global IPO leader, said: “With tightening market liquidity, investors are more risk-averse and favour companies that can demonstrate resilient business models in profitability and cash flows, while clearly articulating their ESG agendas.”

It’s a view shared at City broker Liberum, which believes a track record of profitability, effective cost management and proven revenue growth will be essential requirements for companies looking to float.

Liberum recently predicted that the London market will see some 40-50 mostly smaller-sized IPOs in 2023 for a total fundraising worth around £6.9 billion. That compares with the UK’s 10-year average of 43 a year worth £7.3 billion.

In 2022, it noted that just two companies worth over £100 million braved the testing conditions to make their London stock market debuts.

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These were New Energy One Acquisition Corp (LSE:NEOA), which is backed by energy giant Eni, and North Sea exploration and production firm Ithaca Energy (LSE:ITH). It launched on 9 November in a £2.5 billion float that raised proceeds of £262.5 million, but shares have fallen by around a quarter due to investment uncertainty created by revisions to the Energy Profits Levy.

The picture has been similar on Wall Street, where Liberum said only two IPOs raised more than $250 million (£205 million). The picture in Europe would have been the same were it not for the 7.9 billion euros (£6.8 billion) generated by Porsche (XETRA:P911).

The overall result has been the lowest IPO activity in the US, the UK and eurozone since 2009.

Globally, EY reported that IPO volumes fell 45% on 2021’s record-breaking year to 1,333 and raised $179.5 billion (£147.8 billion), a decline of 61% in terms of proceeds.

The figure for global IPO deals was still 16% higher than pre-pandemic levels in 2019, largely due to 845 new listings in Asia Pacific totalling $120.6 billion (£99.3 billion) in proceeds.

There were also a few select industries and regions that did achieve modest success.

EY said the technology sector continued to lead by volume accounting for 23% of deals, while the energy sector dominated by proceeds, accounting for 22% in 2022.