The prospect of a prolonged period of high interest rates, mixed with cost of living pressures left the Chancellor, Rishi Sunak, with a number of tough decisions to make in his Spring Statement. Interest rates have rose for the third time in four months as the Bank of England tries to soften the impact of the rise in the cost of living.
With the rise (from 0.5% to 0.75%) representing the highest interest rates level since March 2020. The Bank of England citied the increase as a result of the cost of living and strong employment as the predominant reasons for the latest rate rise.
The morning before the Chancellor’s Spring Statement, consumer price inflation (CPI) was confirmed at over 6%, with it being forecast to average 7.4% this year, pushing it to a 40 year high of 9% by the end of the year. Rising inflation also impacts substantially on the forecast growth in the UK economy, recently global gas prices have doubled and oil prices have exceeded $100 per barrel, which is forecast to reduce UK economic growth by a third this year.
What does this mean for the IPO market in the UK?
The rise is likely to affect the IPO market greatly – last year there were 1035 IPOs worldwide, which represented a new all-time record, with global IPO proceeds gaining a record $608bn as global IPO activity surged and valuations were pushed higher by strong investor appetite for equity. However, the raising interest rates could severely dent that appetite, thus having a significant impact on the amount of IPOs this year and could significantly hinder companies IPO plans.
For a lot of the biggest names an IPO still remains the main objective, with some major companies, including Reddit and TPG planning their public debuts for several years now, but it’s hard to predict if they will proceed with their listings if worldwide markets begin to fade.
Companies are finding it harder than ever to retain top talent, adding to the full move back to the office being delayed further by the omicron variant, companies are facing a myriad of obstacles to overcome before considering an IPO.
“Companies must be fully prepared before considering an IPO and they must have an astute plan in place,” said Chris Biggs, Partner at Theta Global Advisors. “The rising interest rates are likely to impact IPOs significantly this year and it could cause companies to delay IPOs until the rise in interest rates calms down. However, some major companies will not be able to postpone their IPOs due to the years of planning they have done, therefore they must have an astute team of advisors to navigate through the current business sector.”
The Chancellor announced a range of plans to combat the rising inflation prices, as well as the cost of living crisis, he announced a 5p cut on fuel duty on a litre of petrol and diesel for one year, which will cost the Treasury £2.4 billion. Next, he announced an increase of £3,000 to the National Insurance threshold which will rise to £12,570, costing the Treasury an extra £6 billion. The Treasury states that this will cause a tax cut for nearly 30 million Brits and will save, on average, £330 for each individual over the year.
“Businesses must be ready to adapt to the Spring Statement announcement and, if they are properly prepared will be able to continue with their future plans,” said Biggs. “Moves must be made to counter growing inflation and the recent interest rates rise is a significant step to counter inflation rises. Global inflationary pressures will grow considerably over the next few months, whilst growth in economies that are energy importers is likely to slow. Companies must consider the rising interest rates in great detail before considering an IPO.”
These trends will also make existing listed cash shells – aka SPACs – even more attractive as a cheaper route to market for companies.