IPO market plunges 70% as higher rates, war curb risk appetite

Stock market listings set a record in 2021 as unprecedented stimulus measures fueled a surge in global equities to all-time highs. Now, the backdrop couldn’t be more different, with central banks raising interest rates in response to mounting inflation and investors spooked by Russia’s invasion of Ukraine.

“This is probably the worst time in five years in terms of market sentiment,” said Li Hang, head of equity capital markets and syndicate at brokerage CLSA.

Rising interest rates combined with sharp market swings have prompted investors to steer clear of companies with high forecast growth rates yet relatively little in the way of current profits --- the kind of stocks that dominate the IPO market.

IPO Slump | PC-Bloomberg.

“You need a more stable market to find the level at which IPOs can clear,” said Saadi Soudavar, Deutsche Bank AG’s co-head of equity capital markets for Europe, the Middle East and Africa.

The Cboe Volatility Index, a widely watched gauge of expected market swings, jumped above 30 when Russia invaded Ukraine and has had an average reading of about 26 this year, signaling IPOs might be too risky of an investment to receive sufficient appetite. Historically, a majority of global listings have been priced when the index has been below 25.

Wild market swings have scuttled IPOs from New York to New Delhi. Life Insurance Corp., which planned to raise as much as 654 billion rupees ($8.5 billion) for the Indian government with an offering before the end of March, now is looking at a mid-May timeline. The offering would be one of the largest global listings this year.

Even quick-fire deals such as blank-check offerings, which are typically priced in a matter of days, are falling by the wayside. The vehicles, also known as special purpose acquisition companies, are shelving their listings at a record pace this year as investor enthusiasm wanes due to poor returns and heightened regulatory scrutiny.

Investment banks are starting to feel the effects: UBS Group AG began laying off a handful of bankers in equity capital markets in Europe, the Middle East and Africa this month, according to people familiar with the matter.

Bright Spots

It’s not all doom and gloom, however. While follow-on share sales start to pick up from Asia to Europe and the U.S., IPOs have been bucking the global trend and racing ahead in the Middle East, where high oil prices and rising interest rates are helping regional markets sharply outperform international ones.

“The Middle East is the one bright spot in an otherwise quiet global ECM market,” said Andree Chakhtoura, head of investment banking for the Middle East and North Africa at Bank of America Corp. “There is a wider and deeper market now than there has ever been before, and the offering is diversified.”

Many major commodities are trading at or near record levels, with the war in Ukraine raising supply concerns. This has already begun to spur capital markets activity.

Qatar’s sovereign wealth fund cashed in on a $1 billion stake in Glencore Plc via an overnight transaction March 23, while WE Soda, one of the world’s largest producers of natural soda ash, is evaluating options including a London IPO, Bloomberg News reported.

Strong Finish

Bankers continue to bet on a recovery in the second quarter, fueled in part by a full pipeline of large listing candidates readying to tap public investors, and the green shoots of a stock market rebound.

“A key question is when we can price the substantial pipeline of European IPOs waiting in the wings; we are hoping the answer is as early as May, June,” said Deutsche Bank’s Soudavar.

A number of high-profile listings from the likes of Thyssenkrupp AG’s Nucera and Italian green hydrogen specialist Industrie De Nora SpA are in the works in Europe. In the U.S., Rihanna’s Savage X Fenty lingerie company and SoftBank Group Corp.-backed chipmaker Arm Ltd. are among the big-ticket IPOs bankers are working on.

In Asia, private equity firm PAG and electric-vehicle maker Hozon New Energy Automobile Co. are in the pipeline with billion-dollar-plus offerings.

“The glass half-full view is that we could be in for a busy second quarter in equity capital markets,” said Andreas Bernstorff, BNP Paribas SA’s head of equity capital markets for Europe, Middle East and Africa. “Would expect to see block trades and equity-linked deals pick up first, and IPOs scheduled after Easter on the back of first-quarter numbers.”