Executive Summary – Uniqus’ Point-of-view
In the dynamic realm of Initial Public Offerings (IPOs), 2024 promises to be a year of transformation and opportunity amidst a backdrop of shifting investor sentiments and global economic dynamics. As the world emerges from the shadows of uncertainty, key trends are emerging, reshaping the IPO landscape, and offering strategic insights for market participants.
Post-SPAC Bust Caution:
Following the exuberance of the SPAC boom and its subsequent correction in 2022, investors are adopting a more discerning approach, prioritizing sustainable profitability and resilient business models. This newfound caution underscores the importance of robust fundamentals in IPO candidates and heralds a period of recalibration in the market.
Elevated Governance Standards:
Recent instances of governance lapses, particularly within the startup ecosystem, have elevated the significance of transparent and accountable governance practices. Investors are increasingly scrutinizing companies for their commitment to ethical conduct and responsible stewardship, signaling a maturation of investor expectations in the IPO arena.
Resurgence of Conventional Sectors:
Against the backdrop of evolving ESG priorities, traditional sectors are experiencing a renaissance as investors pivot towards stability and proven track records. This shift signifies a departure from previous years’ fervor for ESG-focused investments, highlighting a renewed appreciation for established industries with enduring value propositions.
Mitigating Inflationary Pressures:
The abatement of inflationary pressures and the moderation of interest rates are catalyzing a resurgence in economic activity, creating a conducive environment for IPOs. As access to capital becomes more attainable, private equity firms are poised to capitalize on high-growth opportunities, driving momentum in the IPO market.
Global IPO Activity – 2023 vs 2022
A decline witnessed in Global IPO activity during the year ending Dec 2023
• In the realm of global economic dynamics, the trajectory of recovery appears subdued, marked by discernible regional variations. Projections indicate a slowdown in global growth to 3.2% in 2023 from the preceding year’s 3.5%. Notably, data from major economies across the initial three quarters of 2023 signal a concerning trend: a year-on-year contraction in economic activity.
• This deceleration is not uniform across all fronts. Emerging markets and developing economies are forecasted to experience a modest downturn, with growth easing to 4.0% in 2023 from 4.1% in 2022. Meanwhile, advanced economies are poised for a more pronounced slowdown, with growth expected to dip to 1.5% in 2023 from 2.6% in 2022. This trend is attributed, in part, to the anticipated effects of monetary policy decisions taking shape.
• Inflation levels: Another pertinent aspect to consider is the persistent elevation of inflation levels, which continue to surpass targets. Consequently, it is anticipated that central banks will maintain the status quo on bank rates throughout the initial half of 2024.
• Buoyancy across global indices: In the US, the S&P, the Dow, and the Nasdaq gained 24.23%, 13.8%, and 43.42%iv,
respectively across 2023. In Asia, Tokyo’s benchmark Nikkei 225 index grew 28.2%v during the year, while both Nifty and Sensex in India recorded impressive annual increments totaling 18.5% and 17.3%vi, respectively.
• Softening inflation and decreasing borrowing costs, combined with the anticipated growth in sectors including deep tech, energy, mobility, and financial services, are expected to maintain this buoyancy across global IPO markets.
• Regional nuances: Against this macro-economic backdrop, IPO activity has gone up in terms of numbers, however IPO proceeds were on lower side in India’s main market, whereas in the US it has been the other way round. The Middle East markets have been on the lower side in both aspects i.e., number of IPOs as well as IPO proceeds
Sector Performance – IPO Qtr ended Dec 2023
•Leaders: The IT & Technology sector led global IPOs for the first 9 months in 2023, however registering a decline in Q4 2023, with a contribution of 5.73% of the funds raised.
• Largest share: A consistently upward trend was noted in the ‘Consumer Care’ sector in the Qtr ended Dec 2023, which contributed to 25.12% of the funds raised.
• Sector allocations: In addition to the above, the following trends have been noted in IPOs from following sectors in the Qtr ended Dec 2023:
• Financial Institution and Banking, which contributed to 12.06% of the funds raised.
• Logistics, which contributed to 11.32% of the funds raised.
• Asset Management, which contributed to 7.99% of the funds raised.
• Industrial Products – Manufacturing, which contributed to 6.11% of the funds raised.
• Real Estate/Infrastructure, which contributed to 5.73% of the funds raised.
• Biotechnology, which contributed 5.68% of the funds raised.
• Consumer care and financial services sectors led the IPO markets in the quarter ended December 2023.
Regional Trends – 2023
United States of America
• Contrary to the Middle East and India, the US IPO activity remained lower than both 2022 and 2021 levels. IPO activity in
2023 was at its lowest level after 2016 as the market witnessed repeated interest rate hikes and uncertainties.
• That said the S&P 500 ended the year with a 24% rise (driven by tech stocks)vii, and as borrowing costs continue to come down, 2024 could be the comeback year for the US IPO market.
• We believe that the November US elections could influence issuers’ timings in the market – a spur of activity leading up to the elections and one post-election.
The Middle East
• The region continues to attract investments, particularly in
the Metal, Mining, Energy, and Logistics sectors. The spurt in IPO activity during the year testifies to the region’s growing prominence as a safe hub for global investments.
• ADNOC Gas Plc emerged as the single largest IPO that contributed a sizable portion of the total annual proceeds. The GCC countries along with Egypt remained at the core of all 2023 IPO activity in the region.
• We expect a robust pipeline of IPOs in the region during 2024, as bourses here also embark on their sustainability commitments, highlighted during the recently concluded COP28 Summit.
India
• 2023 was clearly India’s year – the number of IPOs in October-December 2023 alone was highest in a decade. Tata Technologies emerged as the most subscribed IPO with applications totaling INR 100,000 croreviii.
• That said, overall IPO proceeds were lower than in 2022, and the bourses witnessed fewer number of large IPOs.
• We expect most issuers to be active during January-Marh 2024 as the second quarter is likely to see the country go to vote, thereby causing a temporary slowdown in IPO activity.
Mega IPOs – 2023
USA
• Leaders: IT & technology sector has been the dominant sector in the USA for mega IPOs. This is consistent with the country’s standing as a pre-eminent geography for listing of IT & Technology companies.
• Promising sector: Consumer Care has been on an upward trend in the 2023 IPO market, with USD 5.28 Bn being raised.
• Laggards: Financial Services did not see any IPO in 2023 with a size of greater than USD1 Bn in 2023. In 2022, there were three such IPOs.
Middle East
• Leaders: Metal, Mining, Energy and Logistics sectors have dominated the mega IPOs in the Middle East in 2023.
• Regulatory updates: In past years, the Middle East markets have made comprehensive regulatory changes to align their regulations and markets with international standards.
• Economic push: Number of countries in the region have implemented tax and economic policies to usher in a more stable business landscape for entrepreneurs and foreign investors.
India
• Lower aggregates: IPO proceeds in 2023 were lower when compared to IPO proceeds in 2022.
• Fewer large IPOs: High individual IPO proceeds (> USD 0.5 Bn) came in 2022 such as “LIC and Delhivery”, whereas in 2023 there is only one IPO (Mankind Pharma), which has been able to raise greater then USD 0.5 Bn.
• Increased IPO volume: India emerged as global leader in the number of IPOs in 2023 and similar trend is expected to continue in 2024.
Post IPO Performance 2023
Analysis
Equity IPOs outshine debt securities:
Throughout 2023, equity securities stemming from initial public offerings (IPOs) have demonstrated a notably superior performance compared to debt securities across diverse markets. This trend underscores the growing allure of equities and hints at a shift in investor sentiment towards high-growth opportunities.
Resounding success of Indian IPOs:
Also, almost all the IPOs in the Indian market have been significantly oversubscribed, indicating investors’ willingness to invest in growth companies.
Strategic opportunities for listing companies:
The robust demand witnessed in equity markets presents a compelling opportunity for companies considering going public. The prevailing investor interest in equities signals a favorable environment for businesses seeking to leverage market enthusiasm and raise capital for expansion or strategic initiatives.
Exercise caution amidst potential uncertainties:
However, investors will have to tread cautiously as the IPO returns of 2023 may not necessarily be sustainable in the medium to long term. This is especially true for the Indian SME market, where returns have been disproportionately positive with limited market depth, indicating the formation of a bubble, which may be waiting to burst.
Anticipating a scaling up of capital market activity:
Looking ahead, we believe that the capital market activity is expected to scale up in 2024 as compared to 2023, even though there may be regional differences in the quantum of scale up.
Regulatory Updates – IPO (US SEC)
SEC, on 24 January 2024, has implemented new rules and amendments aimed at enhancing disclosures and providing additional investor protection in IPOs by Special Purpose Acquisition Company (SPAC) and in subsequent business combination transactions between SPACs and target companies (de-SPAC transactions). These rules are designed to address concerns about the complexity and potential risks associated with these transactions, aligning disclosure requirements and legal liabilities more closely with traditional IPOs.
Key points noted are as follows:
Enhanced Disclosures:
The rules require more comprehensive disclosures in SPAC IPOs and de-SPAC transactions. This includes information on conflicts of interest, SPAC sponsor compensation, dilution, and other crucial details that can impact investor decision-making.
Target Company Responsibilities:
The rules impose certain obligations on the target company in de-SPAC transactions, such as signing a registration statement filed by the SPAC or another shell company. This makes the target company a “co-registrant” and holds it accountable for the disclosures in that registration statement.
Disclosure Requirements for Projections:
In de-SPAC transactions, the rules mandate disclosure related to projections. This includes providing all material bases and assumptions underlying projections, aiming to ensure transparency and accountability in the information presented to investors.
Alignment with Traditional IPOs:
The rules aim to align the disclosure requirements and legal liabilities in de-SPAC transactions more closely with those in traditional IPOs. This is intended to create consistency and a level playing field between different types of public offerings.
Effective Date:
The rules are set to become effective 125 days after publication in the Federal Register, indicating a timeline for companies to adapt to the new requirements.
Investor Protection Concerns:
SEC emphasizes a broader focus on investor protection concerns related to shell companies, blank check companies, and SPACs, recognizing the need for robust safeguards in the evolving landscape of IPOs and de-SPAC transactions.
