Amidst capital markets rollercoaster, shoots of optimism
In Israel, even after the political chaos surrounding judicial reform, July was oddly crowned the best month on the Tel Aviv Stock Exchange in the past year: The Tel Aviv 35 Index climbed almost 7%, while the Tel Aviv 125 Index was up by almost 6%. All this while the S&P 500 rose just 3%.
Yet, July’s rises were some way from correcting the upsets on the TASE in previous months. While the Tel Aviv 35 Index has risen 4% in the year to date, in the
Elsewhere in the world, the trend is similar. In Germany, the DAX index rose by just 2% in July, less than the equivalent Israeli index, but it has put on more than 18% so far this year. The picture is similar in Japan, where the Nikkei 225 fell by 2.7% in July, but is up by nearly 23% for the year to date. Tokyo’s debutants in 2023 are up an average of 75% since their listings, according to data compiled by Bloomberg. That’s more than any other major Asian market that had at least USD 1 billion raised through IPOs over the period.
A report from EY pointed out that in the UK main market and AIM, H1 2023 IPO activity saw a 31% drop in deal numbers compared to H1 2022, but 18 issuers raised £593m, in line with H1 2022 but way of the same period in 2021.
With IPOs adversely impacted by high inflation, rising interest rates and geopolitical pressures, as we move firmly into H2 2023, are there any shoots of optimism?
“US reviving but far from robust”
“Yes, the US IPO market is beginning to revive—although it is far from robust,” points out Anna Pinedo, securities and derivatives partner in Mayer Brown‘s New York office. “The first six months of 2023 have been the slowest first half in IPO activity since 2016. That said, we’ve now seen a number of successful completed IPOs in the consumer sector, which have priced above the IPO range and performed well in the aftermarket. Also, there is more market confidence that the last quarter of the year will bring more IPO activity, including some tech deals.”
“UK has held its own”
Michael Dawes, equity capital markets partner at Bird & Bird: “The UK has held its own in recent months when compared to global capital markets activity, with the London Stock Exchange reporting 179 IPOs and follow-on raises in H1 2023, raising £11bn. Globally equity capital markets have been depressed for the past year, but I think that we’re reaching peak inflation and interest rates, and there are definite signs of activity in the UK IPO market. We’re working on a number of listings that are looking to position themselves for autumn 2023 or spring 2024, when we expect appetite to return in certain sectors.”
Bird & Bird corporate partner and head of Israel Desk, Adam Meisels added: “While it is no secret that in recent years Israeli tech companies have often favored IPOs in the US, there are still many advantages to listing in the UK and regulators are actively streamlining the UK listing regime to further encourage high-growth companies to choose London as their IPO destination. London is home to one of Europe’s largest stock exchanges and Europe’s largest tech ecosystem which remains resilient despite a challenging macro-economic environment. This will stand it in good stead as market conditions improve.”
Which industries look the most likely to withstand these current pressures? What concerns are you noticing from clients of yours that have planned IPOs or issuances?
Mayer Brown’s Pinedo adds: “There continue to be some life sciences IPOs, as well as consumer products IPOs and some financial services deals. We have not yet seen any large tech IPOs. The completed, successful IPOs have generally been smaller deals than in prior years and have had some insider (or “cornerstone”) investor participation going into the deal, which has provided investor confidence.”
She continues: “ Companies contemplating IPOs are weighing whether to proceed in the last quarter of 2023 or wait for early 2024. Many strong well-regarded late stage private companies are considering M&A opportunities instead of IPOs. Those that are not and that still are setting their sights on an IPO in the future, are undertaking financings, but the financings are different—they are turning to private credit funds and looking at pre-IPO converts or debt.”
Guy Ben-Ami at Carter Ledyard adds: Definitely cleantech or green tech with $70 billion spent in the last two years. Artificial Intelligence is still in its infancy with new technologies. There are also IPO opportunities from emerging markets. The cost of regulation remains a concern and opens up the possibility of smaller scale financings and the need for creative lower cost solutions (working with smaller to mid-sized law firms).
Bird & Bird’s Michael Dawes added: “We are seeing a lot of interest in the technologies that support the clean energy transition and advance climate change mitigation. In the natural resources sector, there is increased interest from companies developing battery metals projects and battery technologies given the substantial undersupply of copper, nickel and other critical metals and reliance of batteries on those metals. The main concerns for our clients are the timing of IPOs and fundraisings, which are moving very slowly, as well as valuations and certainty of funding when there are broader economic uncertainties.”
As for Israel, with the extra pressure of the political chaos surrounding the passing of the judicial reforms, what might the likelihood – and real-world impact – be of any rating downgrade?“There is a lot of interest in the United States regarding the developments in Israel,” adds Pinedo of Mayer Brown. “We understand many companies are evaluating redomiciliation transactions to establish their parent companies in Delaware while keeping their operating companies in Israel. That said, the enthusiasm for, and interest in, the technologies developed by Israeli entrepreneurs and companies remains high. There may have been higher valuations for Israeli companies than for their peers during the valuation run-up in recent years and now the adjustment may seem more dramatic, and observers may be attributing some of the adjustments to other factors, like the reforms or downgrade. However, we see continued equity investment, M&A activity, and a lot of direct lending, as well as more warehouse lending and asset based lending by credit funds.”Guy Ben-Ami at Carter Ledyard: ” I doubt this will affect the Israeli market in the long-term, a market which has proved time and again how resilient and strong it is. The Israeli market remains vibrant as ever. There is always a trendy investment focus and Israel is a leader in both green tech and AI too.”
