There has been a significant IPO window in Europe this year, especially in London, with IPO proceeds exceeding the whole of 2016 by the end of the third quarter, which itself saw 74 IPOs Europe-wide.
Companies such as the Polish telecoms company Play Communications SA and Landis & Gyr Holding AG broke transaction size records in Switzerland and Poland respectively, whilst in London, recent major listings included Sherborne Investors (Guernsey) C Ltd and Russian gold maker Polyus, all demonstrating a wide range of company types and share structures.
IPOs moving into 2018
PwC expect investment sentiment to hold up for the remainder of the year, and there is reason to agree with JP Morgan in cautious optimism about the continued flow of IPOs in 2018, although perhaps not with the average 12.9% first day jump in holding value that investors in London IPOs saw in Q2 2017.
The variety of different listings also bodes well for investment choices – 2018 is not likely to be dominated by IPOs in any one sector, whether telecoms or real estate.
Most important for potential investors is the much sought-after – but still not certain – flotation of Saudi Aramco, projected despite the current oil price to be the largest IPO in history, analysts pointing to anywhere between $50-100bn, depending on how investors evaluate the legal and financial risks, whether cross-subsidies or future threats to the oil price.
Judging by their public announcements, the Saudi authorities are determined to push this through in the second half of next year, as it is a key component of the national 2030 strategy, but their insistence on only floating 5% of total equity has posed severe regulatory issues. Exchanges have recognised that unless they reduce their minimum flotation requirement from the usual 25%, the coveted Aramco float will go elsewhere, or even be confined to the local Tadawul market where a listing is definitely planned.
As a result, the UK Financial Conduct Authority in July suggested exempting Sovereign Wealth Funds from related party rules, so independent investors will not necessarily vote on key investment decisions and they will be able to appoint directors unfettered. This concession alone may not guarantee London the flotation, if it happens, as worries over Brexit, the value of sterling, and an exodus of financial talent have not dissipated.
Are IPOs being impacted?
These macroeconomic and geopolitical concerns continue to temper companies’ enthusiasm for IPOs. Ernst & Young’s argument that small to mid-cap listings are more likely in London than major companies therefore looks an accurate assessment for 2018. Chinese ride-hailer Didi, for example, is apparently looking to New York for their eventual listing (although it may not make anywhere near the $25bn canvassed last year); the German industrial group Siemens intends to float its healthcare unit in the first half of next year at a value of up to 40 billion euros; UK mobile phone company O2 could be worth up to £10bn when it eventually gets to market, after a radio spectrum sale which has been postponed until 2018; and UK mobile phone mast owner Arqiva, which in the USA could seek REIT status, is looking to a flotation that could fetch up to £6bn. Most of these companies would be seeking to retire debt, although given only modest forecast rate rises structural reasons for the equity refinancing must be at work.
IPOs in 2018But more likely IPO candidates in 2018 are smaller companies, such as the type of technology company represented by Hybrid Air Vehicles, the airship manufacturer (around the £50m mark), SuperAwesome, AI for advertising compliance mobile apps and video games developer AppBox Media (which is also eyeing NASDAQ), or Turkish simit bread seller Simit Sarayi. Or second, bigger but not mammoth conventional companies such as petrol station retailer MRH (a much larger potential £1.5bn), White Rivers Exploration (a junior gold miner), Russia’s En+ Group (concentrated in aluminium and hydropower), which could also possibly around a similar value, Dubai-based private school operator GEMS Education, currently private equity backed by companies including Blackstone, which could raise much more, indicating the continuing importance not only of the Middle East, but also of education: 113, 345 students as of 2017 speaks volumes about the potential of education issuance.
Companies can still be held up by their need to undertake corporate finance transactions prior to listing. It can be a merger of component elements; the City Pub Company needs to merge its two divisions – shareholders in City Pub Company (West) will must first accept an offer from City Pub Company (East) so that a single entity, The City Pub Group, can seek listing on AIM. Or it can be the need to go through earlier funding stages, as with Engage Technology Partners Ltd, an HR-software and software-as-a-service provider, which benefitted from a £5.3 million funding round in 2017, including £400,000 from itself AIM-listed Primorus Investments, prior to its intended listing next year. Or it can be disagreement about the process itself, given the structure of shareholdings. After a bruising confrontation with some of its 2,700 members, who had first to vote in favour of converting their existing membership interests in a company limited by guarantee into ordinary shares in a new company, OnTheMarket plans to float on AIM next year. The debate finally over, the company is now hoping for a valuation of about £200-300m and intends to use the funds raised to fund growth in a highly competitive market space.
All these transactions, however, illustrate the importance of flotation training courses in helping to determine what steps are required before listing, in what is shaping up to be a competitive and multifaceted listing environment next year.