More realistic pricing needed to boost IPO market, report warns

Companies and investors have been ‘out of step’ since the early 2022 tech downturn, and more realistic IPO pricing is needed to kickstart the listings market. That is the finding of a new report that shows global IPO proceeds are down 32 percent year-on-year over the first nine months of 2023.

Now, however, there are signs of a readjustment. ‘Investors have traditionally looked to valuations of previously listed companies as a benchmark but are increasingly scrutinizing newer IPO pricing, after a quiet 18 months,’ finds EY in its Q3 2023 Global IPO Trends report. ‘Some newly listed companies have now tempered their share price expectations, which should reset pricing levels for IPO hopefuls in the US and Europe.’

Across all regions surveyed, firms have performed better post-IPO in the first nine months of 2023. In the Americas, 27 percent of companies that went public in Q1-Q3 2023 are trading above their IPO price, up from 14 percent for the same period last year.

Elsewhere, however, far higher numbers of companies are performing above their IPO price. In Asia-Pacific, 60 percent of companies that began trading in the first nine months of 2023 are up on their listing price, a 20 percentage-point increase on 2022. Across the Europe, Middle East, India and Africa region, the difference is even greater: 54 percent in 2022 and 77 percent in 2023.

There has also been an improvement in valuations across sectors, with researchers using the energy market as an example: as of September 18, 2023, only one third of energy companies that went public in the first nine months of 2022 are now trading above their initial offer prices, notes EY. That is a stark difference from figures for this year, with more than two thirds (68 percent) that debuted in 2023 seeing the value of their stocks rise.

While health and life sciences, materials and tech listings all saw improvements, EY says ‘the narrowing valuation gap is apparent across all regions, reflecting more realistic expectations by companies and improved market sentiment’.

Arm, the largest and arguably most highly anticipated listing of 2023, set an IPO price of $51 a share, valuing the company at $54.5 bn when it went public on September 14. That is down on the $60 bn to $70 bn it had been targeting earlier this year and, despite a 25 percent first day pop, the UK chipmaker has since traded below its IPO price on multiple sessions.

Changing momentum

‘The global IPO market has seen shifting dynamics, featuring improved investor sentiment in the major western economies, the prospect of high-profile US mega-IPOs, robust emerging markets and a cooling China IPO market,’ write the report authors.

And the improvement in IPO valuations has been particularly impressive over the last quarter, continues EY, with a ‘notable improvement in post-IPO share price performance’ compared with previous quarters.

‘Faced with tighter liquidity and a higher cost of capital, investors are turning to companies with strong fundamentals and a path to profitability,’ says George Chan, EY global IPO leader, in a statement. ‘In response, IPO prospects need to demonstrate their financial health and potential for value creation. As valuation gaps narrow, investors are reviewing the post-listing performance of the new cohort of IPOs, which – if positive – could renew market confidence.’