Are you concerned about the recent global slowdown in IPOs? Here’s a comprehensive look at why the initial public offering market has gone from record-breaking to full-on abating. Buckle up: it’s time to explore the factors behind this trend.
Introduction to the Global IPO Market
Initial public offerings (IPOs) are an important source of capital for companies wishing to list on a stock exchange. When a company launches an IPO, it offers shares of its stock to the public through the exchange. This makes raising capital through equity financing possible, whereby investors take a portion of ownership in return for their investment.
Several distinct trends over recent years have characterized the global IPO market. In 2018, the number of IPOs launched worldwide reached its highest level since 2007—an impressive testament to the strength and stability of global capital markets. 2019 saw continued activity, with 337 IPOs raised that year.
However, 2020 brought a dramatic slowdown in activity due to several factors such as increased economic uncertainty caused by Covid-19 and geopolitical tensions driven by heightened trade protectionism. As a result, the global IPO market has gone from record-breaking heights to full-on abatement within just two short years.
Global IPO market went from record-breaking to full-on abating
The slowdown in the global IPO market – which went from record-breaking to full-on abating in just a few months – is initially attributed to market volatility that saw billions of dollars being pulled out of promising young companies. Additionally, high valuations and intense shareholder scrutiny has put the brakes on many key deals.
Beyond these external factors, there are also internal trends affecting the IPO slump, such as corporate governance scandals and economic uncertainties impacting different national markets worldwide. Intensifying competition from private equity and venture capital investors has further contributed to the wave of deceleration in this sector. In light of these complexities, many established businesses have adopted an aversion to going public and have elected to seek alternative funding sources such as debt markets or venture capital rounds instead.
Overall, we are likely seeing a natural correction in the market following a booming period fueled by historically low interest rates and major levels of stock market confidence. Global conditions like these cannot sustain exponential growth indefinitely, so it’s understandable that IPOs will eventually slow down until worldwide markets can find a new equilibrium.
Impact of the Global IPO Market Slowdown
The global initial public offering (IPO) market has experienced a significant slowdown in recent quarters, due to economic, political and market volatility. The number of global IPOs in the first quarter of 2019 was down by 25% from the previous year, and both deal value and volume were at their lowest levels since 2013. This is having a significant impact on equity capital markets activity, as companies move away from traditional IPO opportunities in search of alternative sources of financing.
The primary reason for the slowdown is macroeconomic uncertainty. Many companies are facing increasing headwinds had widespread geopolitical shifts including trade tensions, Brexit and US snapback sanctions, with their potential effects on global financial markets causing further concern among potential investors. This has necessarily caused increased caution amongst issuers looking to enter into listings or fundraisings during these troubled times.
Substantial volatility between key stock indices has also shaken investor confidence globally. The S&P 500 Index and NASDAQ Composite posted their worst performances within certain sectors during December 2018 and January 2019 since 2008 -2009 crisis, though there has been a gradual recovery throughout this year so far. Furthermore, with technology stocks leading much of the growth over the last one-year period, there may be expectations that they will struggle to repeat such performance levels which may further impede enthusiasm for IPOs from these sectors over the near-term .
Finally investors have become increasingly selective when evaluating deals for listing or fundraising activities; often unable to pin point identifiable revenue streams or models that will support projections for long term growth – leaving only low risk cash generative businesses able to successfully navigate these IPO waters. As a result weakened appetite from investors has meant many companies have chosen not to proceed with offering plans – or have had to reduce pricing expectations significantly at market entry.
Regulatory Changes and the Global IPO Market
Regulatory changes and the global IPO markets have been key players in why the market is experiencing a slump, with investors and issuers co-contributing to this slow phase. Investors have become more hesitant when investing in IPOs primarily due to their lack of trust in corporate disclosures, leading them to question whether or not the IPO is a viable option or worth their time. On the other hand, issuers have also contributed to this problem. Many are increasingly struggling to meet regulatory requirements for their IPOs due to continually changing rules and regulations surrounding them. This has resulted in reduced access for companies considering listing on public exchanges.
The changes imposed by various regulatory bodies around the world have led to uncertainties and increased expenses that are giving cautionary investors second thoughts when considering participating in an initial public offering. These regulations include increased audit requirements and greater disclosures that aim at ensuring transparency amongst all IPO stakeholders, such as shareholders, market analysts, issuers and regulators. The evolving regulations often pressure both preparations and pricing of IPOs and other legal requirements that must be fulfilled before going public.
Furthermore, with tougher regulations come harsher penalties if these guidelines are not met or if any fraudulent practices are found during audits – causing further delays in the registration process. This has caused strain on both capital markets corporations who typically facilitate these activities as well those who wish to take advantage of going public like startups around the globe have seen a decrease in activity due to these regulated imposed changes in recent years.
Economic Uncertainty and the Global IPO Market
The global IPO market boomed in 2019, but has taken a sharp turn in 2020 and begun to abate. Economic uncertainty stemming from the COVID-19 pandemic has had a major impact on the IPO market, and many companies have been reluctant to launch public offerings amidst these conditions. Additionally, stock markets around the world have been volatile, resulting in a decrease of overall confidence among prospective issuers.
Furthermore, the resulting recession from this pandemic has resulted in an increased reluctance from potential investors willing to purchase shares of newly public companies. With fewer buyers, those that are willing are able to demand higher prices for stock, making it unappealing for issuers and potential investors alike. Likewise, existing IPOs may also experience a further decline in value due to decreased demand for their shares, as well as overall declines in investor confidence due to broader economic conditions also impacting these companies.
Coupled with this economic reality is a trend toward long-term growth plans rather than short-term gains that traditionally accompany an Initial Public Offering (IPO). Companies are now looking to fund multiple rounds of financing before they pursue an IPO due to their focus on sustainability over quick returns that can often be associated with a traditional IPO. Finally, companies around the globe were already shifting towards private fundraising models prior to the emergence of COVID-19; some of these trends include venture capitalists providing more funds or strategic corporate investments providing alternative capital sources which can further provide insight into why global IPO’s have seen such an abrupt decline over recent months and quarters.
Geopolitical Factors and the Global IPO Market
The global IPO market witnessed a record-breaking amount of activity in most regions during the last two years. However, the global IPO market saw a drastic slowdown after 2019, with many investors holding back from entering the market.
A number of geopolitical developments led to this abatement in the market. Firstly, the ongoing trade war between China and USA has led to an uncertain future for many companies that operate globally. This was further accentuated by other existing conditions such as Brexit and its potential implications, US-Iran tensions, Iraq conflict amongst others also leading to hesitancy among investors on investing in IPOs. Other factors contributing to this abatement include the rising cost of debt in developed markets and general investor sentiment continuing their momentum from previous years.
Moreover, other local regulations have also affected many countries either limiting liquidity or restricting companies from making large capital investments due to lack of clarity on regulatory policies amidst these geopolitical factors. All these factors have caused caution among global investors before they enter into subsequent deals leading to this slowdown in global IPO activity recently.
Market Volatility and the Global IPO Market
The blockbuster year for IPOs in 2019 was reduced to a trickle in 2020 due to the impact of coronavirus. In 2019, global IPO activity saw a total of 7,948 IPOs with proceeds amounting US$ 230.3 billion. In 2020 however, only 1,360 IPOs raised around US$70 billion – a 70% decrease compared to 2019.
The primary factor driving the downturn in IPO activity is market volatility and investors’ heightened risk appetite due to the pandemic crisis. When markets become volatile, investors become wary as they may not want their long-term gains wiped away by short-term drops. This wariness has resulted in lower levels of investor demand for new issues and has caused new investment capital allocations to dry up or be put on hold until market conditions improve.
IPO issuance requires both issuer and investor confidence in order for it to keep up with previous levels from previous years. As major stock markets across the world are fluctuating between record highs and valleys due to uncertainties about economic recovery, investors are showing further apprehension about their appetite for fresh investments plunging the global IPO market into deeper abatement.