Foreword:
Welcome to our latest survey analyzing institutional investor sentiment toward initial public offerings (IPOs).
We are pleased to be able to report that attitudes globally are extremely positive. Among our survey base of 321 investors around the world, 82% have invested in pre-IPO or IPO stocks in the last 12 months, compared with 18% that invested in these stocks during the past two to three years. We expect this positive momentum to continue. Investors cite the prospect of a brighter earnings outlook, improving macro-economic conditions, more stable equity markets and strengthening risk appetite as the top factors likely to improve market sentiment going forward.
Investors are also clear about what they look for in a successful IPO. Good-quality companies priced right, run by the right team and with a good story to tell will command the attention of the market, even when market windows are opening and closing fast. They rank the top three success factors for IPOs as attractive pricing (the leader by a considerable margin) followed by a compelling equity story in second place and confidence in management in third. Timing was ranked a distant fourth.
It is interesting to note that investors expect to favor investment in their domestic markets for the next three years. This sentiment was particularly true of investors in North America. However, investors in Europe and the Middle East and North Africa region are more willing to invest internationally. We also found that over half the investors surveyed now give active consideration to exchange venue when considering their investment decision.
Top challenges to IPO success include wrong pricing, wrong management team and going out to market too early. The good news is that all of these can be managed by companies wanting to list. As ever, it’s all about delivering on your promises — ensuring operational excellence, fulfilling investor expectations, using proceeds as promised and putting in place the corporate governance practices that will sustain a well-managed quarterly reporting program.
Ernst & Young has been the leader in taking companies public for more than a decade. We hope that the perspectives we offer here are of interest and would be happy to share further information and insight on request with companies preparing to list, with investors, and with those already established on the public markets.
Confidence is rising
The appetite for investment in IPOs among institutional investors has picked up substantially over the last year. Although the number of IPOs was low in 2012 compared with other years, 82% of institutional investors surveyed have invested in IPO and pre-IPO stock in the past 12 months.
This renewed interest in IPOs as an investment opportunity perhaps reflects the high quality of companies that have successfully navigated their value journey despite the downturn. It also dispels the myth that investors are not interested in IPOs and demonstrates that confidence is returning.
Investors are reallocating capital to equities
Although the amount of capital raised globally in 2013 for IPOs was down by 24% (US$128.6b) on 2011 levels and the number of deals was down 32% to 835, our survey points toward positive momentum in 2013. The key factors cited by institutional investors as most likely to drive an improvement in IPO market sentiment in 2013 are: a brighter corporate earnings outlook, stabilization in macroeconomic conditions, more stable equity markets and higher investor risk appetite.
It is interesting to note that higher appetite for IPOs was most marked among larger institutional investors. As confidence returns, there is greater appetite for risk-bearing assets, and institutional investors are reallocating capital to equities, particularly given the prospect of a continuing low-interest-rate environment, which is making new bond purchases relatively less attractive.
Maria Pinelli | Global IPO Leader | Ernst & Young: "It’s a myth that institutional investors do not support the IPO market. Our results show that sentiment is extremely positive. We believe it will remain so if we continue to see a brighter outlook for corporate earnings, improving macroeconomic conditions and more stable equity markets.”
Figure: 82 % of institutional investors surveyed have invested in IPOs in the last 12 months
Brighter earnings outlook is the primary driver for investment confidence in all regions bar one
Investors in almost every region rank a brighter earnings outlook as the key driver for improving IPO market sentiment. In Asia, confidence is particularly strong, in part fueled by strong private equity (PE) and venture capital (VC) interest, which is driving prices of pre-IPO stock higher.
Perhaps unsurprisingly, right pricing is the top success factor for IPOs in Asia, by a greater margin than in other regions. There is a strong pipeline of companies waiting to take advantage of these higher valuations, with 882 companies registered to list on Chinese exchanges at the end of December 2012.
North America is the only region where the picture is different. Here, by contrast, investors say that stabilization in macroeconomic conditions is the factor most likely to drive improved IPO market sentiment. This concern over the state of the economy was evidenced by the unprecedented public outcry at the end of 2012 over the US Government’s management of the fiscal cliff, in which over 12,000 US citizens signed a petition calling for better management of the country’s economy.
As the economy improves through 2013, we would expect investor sentiment in North America to fall into line with other regions.
Pre-IPO preparation is critical
Against a backdrop of rising market and investor confidence, institutions cite attractive pricing, a compelling equity story and confidence in management as the top three factors influencing IPO success. Attractive pricing is ranked the top critical success factor across all geographic regions and investor types. Confidence in management is in the top three everywhere except Asia, where it is ranked fourth behind market timing.
Notably, at a global level, price, story and people ranked ahead of “right timing” by a significant margin. Readiness to provide transparency and good corporate governance completes investors’ perceptions of the top five critical success factors for IPOs.
Good-quality companies always get noticed
We know from our experience that for an equity story to be compelling, companies need to provide evidence that the business model has performed well through a downturn and that there is a solid track record of growth, an actionable plan to sustain growth and a clear rationale for how IPO proceeds will be used to fund growth.
Our survey results suggest that good-quality companies priced right, run by the right team and with a good story to tell will always command the attention of the market, but it does not mean that timing is not an important factor. The window for successful offerings in current market conditions is constantly opening and closing, often quite quickly. Those companies that are well prepared to go public will be able to launch when the window opens up.
Investors focus on a combination of financial and non-financial factors
In deciding which deals to support, investors cite cash flow and valuation based on P/E, P/BV and other earnings ratios as the top two financial criteria by some margin.
Of the non-financial factors, management credibility and experience is considered the most important, followed by market size and opportunity and brand strength. This focus on factors relating to the company’s growth potential underlines the importance of strong top-line growth prospects for investors. The low scores for some of the financial criteria also illustrate this point. For example, dividend yield (6%) and net margin (4%) were given little importance by respondents and fell outside the top 10 factors in considering an IPO, suggesting that investors are focusing much more on long-term capital gain rather than a short-term buy and sell strategy. This mix of financial and non-financial factors is consistent with previous Ernst & Young surveys and holds true across all markets and investor types.
Market opportunity is the top external IPO success factor
In terms of external factors influencing IPO success, the market opportunity to seize growth was seen as overwhelmingly important, with 90% of investors citing this as a top driver underlying their interest and motivation to invest in new listings. It is also clear, however, that in the current market investors remain sensitive to IPO valuations. The second most important driver of interest in new listings was the company’s current valuation level (cited by 83% of investors).
