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Australian floats have been in hibernation for 18 months, but stable interest rates and lower market volatility could bring them out of hibernation.
The most intense financial market turmoil since the global financial crisis has not stopped equity capital markets (ECM) bankers talking up the prospects for a revival of Australia’s initial public offering market.
ECM bankers are looking through the doom and gloom induced by the rescue of Silicon Valley Bank and the demise of Credit Suisse to a brighter IPO market, with the proviso that interest rates stabilise and volatility in financial markets recedes.
Investment banker Mark Warburton is bullish about IPOs, as long as volatility subsides. David Rowe
Ironically, it was veteran Credit Suisse ECM banker Campbell Lobb, who developed one of the most reliable measures of the market readiness for IPO activity. His leading indicator is the S&P 500 volatility index (VIX), which is widely used across the market.
Mark Warburton, who is Bank of America’s head of Australia equity capital markets, says that before the SVB rescue, the VIX was sending positive signals pointing to the IPO market waking from an 18-month hibernation.
“If you look at the volatility index over the last 20-odd years, 80 per cent of IPOs have occurred when the VIX was below 20,” he says.
“There’s obviously been points in history, such as COVID-19, the US-China trade war, the flash crash and the global financial crisis when it’s spiked, and when that happens, the IPO market shuts.
“But you don’t need to have necessarily a roaring bull market for IPOs to come back. We just like a bit of stability for IPOs to occur. Over the last year, the VIX was above 20, and there were basically no IPOs.”
Warburton says the rescue of Silicon Valley Bank and the takeover of Credit Suisse by UBS caused a spike in the VIX to 26.5. However, on Wednesday, the VIX fell to 21.4 as the world’s five leading central banks provided liquidity to the global banking system.
BofA is already finding signs of IPO activity picking up and that augurs well for the year’s biggest float, that of Virgin Australia by Bain Capital. Virgin’s management, led by chief executive Jayne Hrdlicka, has been in Asia on a pre-IPO roadshow.
“There is quite a pipeline coming through and investors are telling us that they think the first draft of IPOs will probably be the good ones because you’ve got to be brave enough to go out,” Warburton says.
He says investors will demand that companies coming to market are “confident in their story, profitable, and have good market positions”.
Another leading ECM banker at a rival firm says the most important criteria for a revival of the IPO market in Australia will be a stabilisation of the interest rate outlook and lower market volatility. He agrees that the VIX needs to be sustained below 20 for several months.
He says there were only two IPOs worth more than $100 million last year, which means there has not been a decent-sized float (exceeding $1 billion) for 18 months, which is a long time in the wilderness.
One of the factors that will contribute to a return of IPO activity is the willingness of big superannuation funds to deploy their cash inflows, which are running at about $100 billion a year.
Data prepared by Warburton for The Australian Financial Review shows that super funds are flush with cash because of the flow of money coming out of the equity market through dividends and buybacks.
Since 2021, about $239 billion in cash has been returned to shareholders through ordinary dividends of $193 billion and buybacks of $44 billion. This far outweighs the capital calls made since 2021, including the $71 billion in follow-on share issuance, the $14 billion in IPOs, and the $88 billion cash component of takeover offers.
Another factor working in favour of IPOs is the growth in total super fund assets relative to the total sharemarket. Australia’s ratio of super fund assets to the market capitalisation of the ASX is 1.4, which is much higher than the ratio in other countries such as Canada at one times market cap, and the United Kingdom (0.9 times) and the US (0.7 times).
Super funds are natural buyers of IPOs because of the need to diversify their Australian sharemarket holdings. A recent study of the top 20 individual shareholdings of the largest 14 super funds by National Australia Bank found that these comprised 25 per cent of overall holdings of listed shares globally.
The study, which utilised the portfolio disclosures of the super funds, found that the following four stocks accounted for 10 per cent of the holdings of the top 14 funds: BHP, CSL, Commonwealth Bank and NAB.
Warburton’s optimism about the IPO market stems from other data points, including a change in sentiment late last year. “We think … bearishness peaked about October or November. That’s also when cash levels generally peaked.”
He says China’s reopening in January buoyed market sentiment and that led to the best January for trading on the ASX in more than 20 years.
“We did a couple of deals in Asia in the first couple of weeks of January, and they traded well. The hedge funds were back in January after basically being asleep for the second half of last year.
“BofA raised $700 million for Nickel Industries in mid-January, which was the biggest pre-Australia Day deal for about 12 years, and we very much saw the investors were back and ready to play.
“I think it was risk-on again, after being risk-off last year. The China reopening buoyed them. Also, because it was early in the year, they were looking for performance. They were looking for alpha, so they were prepared to have a bit of a swing.
“We think people were starting to say they’re looking forward to IPOs coming back after a year when there were virtually no IPOs anywhere in the world. We did the Porsche IPO in Europe, which was about the only one.”
Warburton says IPOs would normally be kicking off about now, but people aren’t quite ready to go. “But there’s a lot of activity now as plans are set in motion for companies to list in the second half.”
Another banker said the Virgin IPO could easily be rolled over to later in the year if there remained volatility in financial markets and uncertainty about the Fed’s fight against inflation.
Inflation is a nagging problem for IPO promoters because a prospectus needs earnings forecasts and these demand certainty about costs. Many companies suspended guidance during COVID-19 and will be cautious about providing guidance out to next year.
As a footnote to Lobb’s pioneering use of the VIX as a leading indicator of IPO activity, it is worth noting that he was highly innovative in many other aspects of equity capital markets.
He was the brains behind the first over-allotment option in an IPO, also known as the “greenshoe”. This was used in the first tranche of the privatisation of Telstra.
He led the first combined ASX and New York Stock Exchange IPO, which, again, involved Telstra. He invented instalment receipts used by Commonwealth Bank and Telstra.
Lobb also pushed through the first broker firm bidding and commitment process for IPOs, as well as book building for price and size at a time when Australia had fixed price underwriting.
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