SME Exchange: Gauging the health of the IPO market

RECENTLY WE were presented with two very different views of the market for initial public offerings (IPOs). The first reported that the market is very healthy, with fundraising in the second quarter of 2011 rising significantly compared to the first quarter. The second view said that there has been a complete breakdown in trust between the different market participants in Europe, with the result that the IPO market is stumbling and flotations are either pulled or trading below issue price.

The reports provide quite a contradictory picture. So who is right and who is wrong?

Let’s look at the reports in a little more detail. The good news was found in Ernst & Young’s Q2 2011 Global IPO Update. It said that global IPO fundraising activity rose by 39% in the second quarter compared to the previous quarter of 2011 and increased by 38% compared to the second quarter of 2010. This amounted to 378 IPOs globally raising a total of $64.6bn (£40.1bn). In Europe, exchanges saw a 534% rise in capital raised ($17.7bn raised in 95 IPOs) compared to the first quarter, primarily due to the listing of Glencore International in London, the largest global IPO. London raised the most capital.

However, under the headline ‘It’s official: the IPO market is broken’, Financial News wrote that there has been a seizure in the IPO market, with 23 of the 25 large deals proposed or completed in Europe this year being pulled or trading below their issue prices. The paper also reported that there had been a complete breakdown of trust between different participants in the European market for IPOs.

So is the European IPO market in crisis, as Financial News would have us believe? With approximately half of the deals launched this year failing completely, they might have a point. Or does the picture of healthy fundraising as painted by Ernst & Young provide a truer view of the IPO market?

The answer is that they are probably both right. In fact, what we really need to do is look at the differences between the market for large-scale IPOs and the fundraisings and listings of smaller companies. There is clearly a divergence between the two.

Our view of the SME sector is that things are beginning to pick up, albeit slowly. Admissions to the PLUS Stock Exchange have been encouraging during the first half of the year: 10 companies have come to market and the pipeline of companies looking to list is certainly healthy.

However, we are very aware that it remains difficult for SMEs to raise cash, especially from institutional investors. A company needs to have a strong proposition and be prepared to work hard to find funding.

We still see a trend for companies to come to market without raising funds at admission, then building a profile on market before going out to raise cash at a slightly later stage, at which point they have established a presence on market.

We also see a growing number of companies looking at innovative ways of raising cash, by issuing convertible loan notes or convertible preference shares, for example. Sometimes they are looking to raise cash without diluting their shareholder base or to offer more tax-efficient forms of investment.

Given the diversity and complexity of the IPO market, it is difficult to provide a single view of its overall health. It is true that it remains a challenging market, and the greater the number of IPOs that succeed, both big and small, the better it is for issuers and investors alike.

Nemone Wynn-Evans is chief financial officer of PLUS Markets Group, a London-based stock exchange and a market operator providing cash trading and listing, derivatives and technology services.