The UK’s equities markets have experienced a significant hit in the first half of 2022 when compared to the same period last year with a combination of the conflict in Ukraine, the recent announcement of inflation hitting 10.1% and investors generally becoming reticent.
As a result, the London Stock Exchange (LSE) has gone through a period of diminished public listings – with those that have gone public significantly underperforming as Brexit and listing rules were also perceived to be less founder friendly – leading to IPOs being down 95% in H1 of this year in terms of capital raised.
There have been poor reactions for high-profile companies such as Haleon, the UK and Europe’s largest listing in over a decade, which entered the LSE with an anticipated valuation of up to £45 billion and is now down to a market cap of £24.2 billion. This comes after last year’s underperformance of anticipated stocks such as Deliveroo, which was branded the “Worst IPO in London’s history”, causing listings on the LSE to dramatically decrease as investors and fund managers become increasingly risk averse.
This, alongside the average stock in Nasdaq trading 40% below its 2021 levels back in March 2022, has made it less justifiable for companies to list during a time of record low valuations.
So what’s going wrong?
One of the main factors that’s harming valuations is higher interest rates. To combat inflation, the Bank of England recently announced an interest rate increase to 1.75%, and with markets now pricing in multiple rate hikes across the globe in 2022, valuations decrease as higher rates harm firms’ potential future earnings. Chancellor of the Exchequer, Nadim Zahawi, has set up talks with senior finance executives to develop new ways to boost the City of London’s attractiveness for companies and investors. Setting up a dedicated fund to invest in equity offerings and entice institutional investors to participate in share sales were among the suggested ideas
However, as UK companies steer away from public markets, private equity firms have turned their gaze towards the UK as low valuations allow them to acquire companies at a “discounted” price. American investors are also looking to capitalise on the weaker sterling, making companies now nearly 20% cheaper to buy in the UK.
Light at the end of the tunnel?
“Both global and UK businesses are still looking to list on the LSE, however, until economic conditions strengthen, and investor trust and appetite is restored, the city will continue to experience a largely inactive IPO market,” said Chris Biggs, CEO of accounting and consultancy firm, Theta Global Advisors. “I think we will eventually see an increase in UK listings, but this won’t happen until inflation numbers stabilise, looming recession fears fade and the Ukraine conflict subsides, lifting the curtain on what remains an uncertain economic outlook.”
In the meantime, Biggs thinks we’ve quickly moved into an environment where companies are seeking funding from private equity vehicles or strengthening their position through M&As. This is largely because companies can’t wait for an IPO to continue with their growth plans, and private equity houses are sitting on a pile of dry powder and need to get their cash out in an environment of high inflation.