IPO market plummets to historical lows as capital dries up

Entrepreneurs struggling to get funding to grow their business should think very carefully before deciding to raise capital via an IPO (initial public offering) – new research from PricewaterhouseCoopers has revealed that the number of sharemarket floats

Entrepreneurs struggling to get funding to grow their business should think very carefully before deciding to raise capital via an IPO (initial public offering) – new research from PricewaterhouseCoopers has revealed that the number of sharemarket floats in Australia has dropped dramatically this year, and activity is likely to be stagnant for the next six to 12 months.

There have been just 24 IPOs in the 11 months until the end of November, compared with 68 in the same period last year. And while December is typically a big month for IPOs – there were 23 last year – PwC partner Greg Keys is only expecting one or two this month.

Keys says the dramatic fall in the Australian sharemarket and weakening economic conditions have shattered investor confidence and decimated support for new floats. In the last few months Burrup Fertilisers, Qantas Frequent Flyer and carsales.com.au have all abandoned plans to float.

Small caps hit hard

Keys also says size is an issue, as the Australian IPO market is typically dominated by smaller floats (under $100 million). In the current environment, investors want nothing to do with small caps.

“I think that small size factor isn’t ideal in the current market. Larger floats usually have better earnings track records, and they tend to be less reliant on any one factor or customers or contractor.”

Of those 24 companies that did float, only two have held or exceeded their listing price since hitting the boards. The average funds raised per company dropped from $15.6 million last year to just $5.6 million and the average market capitalisation of IPO companies more than halved from $59 million in 2007 to $24 million in 2008 – a level Keys says is arguably too small to justify, or support, a public listing.

But while the number of floats from the financial services, property and biotechnology sectors have fallen substantially, there has been a big jump in the number of IPOs in the renewable energy and clean-tech sector. Keys expects IPO and capital raising activity in this sector will increase as the 2010 deadline for the implementation of the Federal Government’s carbon pollution reduction scheme approaches.

Other capital options

So if the IPO is off the table for most entrepreneurs, what other funding options do they have?

Keys says it depends on the entrepreneur’s objective. If they are seeking to exit the business, a trade sale or a sale to a private equity firm might be the best approach.

“There is still plenty of equity out there, but it’s cautious equity and patient equity in the current market.”

If you are trying to raise capital to expand your business, a private equity injection or an injection from one of the world’s huge government-backed sovereign wealth funds might be an option, particularly for larger companies.

“We’ve only seen SWFs working at the margins in Australia, but we do think over the next decade that sort of activity has become more prevalent.”

But anyone trying to sell a business or raise capital should expect some tough negotiations. Asset prices have fallen in recent months and vendors will need to be realistic about their price expectations.

Outlook

Keys expects the IPO market will recover slightly towards the end of next year as sharemarket conditions and investment sentiment improves. He is tipping 30 to 40 floats in 2009 – well down on the long-term average, but still an improvement on this year.

He is particularly expecting a rise in the number of floats from the consumer and industrial products sectors, providing these businesses can demonstrate good earnings track records.

“Good quality businesses can always IPO. It’s just a question of what price.”

Related stories:

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• Market loses its appetite for IPOs