How is the IPO market looking in 2019?
So far in 2019 the IPO market in Australia has been relatively subdued. This isn't unexpected, particularly given the imminent federal government election and global market volatility driven by concerns over the US-China trade situation, Brexit and other factors.
Last year we saw a small number of $1 billion+ IPOs for the first time in a little while. We believe these listings have provided investors with some confidence that the market is starting to open (even if only slightly). Our sense is there is now an incremental increase in companies looking to list in Australia. This interest still remains constrained, as it has in recent years, to the small and mid-cap space.
The number of these new transactions, and the number of transactions still on ice from 2018, that will reach the finish line will depend on how the market and broader economic conditions look after the election, but there are positive signs that the interest is there should the market continue to open up.
From a legal perspective the ASX is progressing some changes to its Listing Rules relevant to IPOs, but they are not significant and are not expected to have any material impact on the market.
What about the market for secondary raisings?
We think the pipeline of secondary raisings will remain strong despite the absence of any major raisings outside the hybrid space so far this year.
Over the last few years, we have been involved in a number of significant rights issues and placements that have been used as a form of acquisition or project financing and that is a trend we expect to see continue, particularly in infrastructure. In 2018 these included:
- Transurban's A$1.9 billion secondary capital raising to fund its WestGate Tunnel Project
- APA's $500 million secondary capital raising to fund its growth projects and capital expenditure program
- Transurban's A$4.8 billion secondary capital raising (a combination of a $4.2 billion PAITREO and $600 million placement) to fund its contribution to the Transurban consortium acquisition of 51% of WestConnex for $9.26 billion
- Woodside Petroleum Limited's A$2.5 billion pro-rated accelerated non-renounceable entitlement offer as counsel to the joint lead managers
- Worley Parsons A$2.9 billion pro-rated accelerated non-renounceable entitlement offer as counsel to the joint lead managers
Transurban's Westconnex capital raising was particularly notable as it was the largest ever secondary capital raising used to fund an acquisition in Australian history, and was the fourth capital raising Transurban has undertaken in the last 5 years. In that time, Transurban has successfully raised around $11 billion via secondary equity issuances.
In 2019 we have already seen strong demand for hybrid security offers despite the uncertainty around the future of franking credits, which suggests that there is appetite out there for the right offers.
What sectors are we expecting to 'run hot'?
We are seeing activity in the technology and healthcare sectors and expect that to continue.
With the rise of the services economy these areas will continue to grow and diversify, especially in the healthcare sectors where large players (e.g. hospitals) will exist alongside smaller players, for example in medical device and health tech IPOs. More broadly, companies that successfully deploy technology solutions will always be attractive listing prospects in Australia and globally. We expect there will be a number of large IPOs of 'unicorn' tech stocks in the U.S.
There are also a couple of big demergers proposed in Australia and other companies will continue to consider that option to realise value for non-core businesses as investor focus shifts to core business operations.
Finally, as certain commodity prices strengthen, we expect to see more IPOs and secondary raisings for acquisitions and growth projects in the resources sector.
Are we seeing any changes to the approach boards are taking to ECM deals?
There has been plenty for directors to think about recently, particularly as a result of the findings of the Financial Services Royal Commission, and the cartel proceedings commenced by the ACCC in the ECM space.
This heightened focus on corporate governance and ECM deals does not seem to have deterred boards from raising equity capital where the need arises. What it means is that boards are particularly focussed on testing the structure and appropriateness of a transaction and ensuring it is the right approach for the company and its shareholders as a whole. Boards who fail to execute raisings with an appropriate structure and in a timely fashion can face intense scrutiny from stakeholders, including shareholder activists whose presence is being increasingly felt in Australia.