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May 17, 2017

INITIAL PUBLIC OFFERINGS AN UPWARD TREND

There has been a great deal political turbulence in the UK in the past 12 months following the result of the EU referendum, and the weakening of the pound has led many to forecast a bleak and uncertain economic future for the UK economy. It is unclear what effect the triggering of Article 50 will have on UK business and trade in the long run. However, far from seeing a downturn in activity, the London Stock Exchange (LSE) has reported a surge of activity in the first quarter of 2017.

 

Globally, the quarter one has witnessed the highest number of Initial Public Offerings (IPO) since 2007.[1] In the UK, it is estimated that London has raised more than $1.1bn in public offerings on the LSE AIM and main market. According to the Investor Chronicle ‘more money has been raised via IPOs and capital raisings on London's main market in the first quarter of 2017 than it was in the first three months of 2016 [3]. In the first four months of the year, the LSE listed 12 IPOs which makes up 3.3 percent of all IPO listings globally. Of those 12 IPO listings, three were cross-border IPOs from the US and Italy. Global stock market figures report that the LSE listed 54 IPOs throughout 2016, representing 4.9 percent of all IPOs listed. [4] These figures seem to show that 2017 could be promising year for London. Ernst and Young do however report that this is not entirely unpredicted; a weak pound, for example, has attracted further investment in UK stock from overseas investors. The government’s decision to trigger article 50 has also given companies a two-year deadline in which they can take advantage of greater access to European investors and the European passport regulations.[5]

 

Ernst and Young’s predictions for the UK stock market are likely to be realised with reports of several exciting listings in the pipeline for the next 12 to 18 months. One of the most highly anticipated listings of 2017 will likely be that of Saudi Arabia’s leading oil company Saudi Aramco which has announced that it intends to publicly list 5 percent of the company on both the Saudi stock exchange and one other international market. Aramco has not yet announced which international market it intends to list on but much of the focus seems to be on London and New York. As the world’s largest oil company this listing will represent the largest public listing worldwide. The exact value of the listing is currently unconfirmed and is the cause of much debate. Reuters have suggested that the sale is likely to raise $100bn.[6] Other reports have suggested that the listing could reach anywhere between £400bn and two trillion pounds [7]. It is expected that the oil giant will decide which market to trade on by June. Whichever market they choose to trade on it will undoubtedly be a significant boost for international trade.

 

It is also reported that Kuwait Energy plc, the independent oil and gas company based in the Middle East is looking to a one billion dollar public offering on the LSE. Further positive news for the market comes from that of the multinational professional services firm TMF, who have confirmed they are planning a one billion pound float on the LSE in 2017 with a potential IPO listing in the pipeline for the summer.

 

Whilst the majority of the reports for the first quarter appear to be positive, the political upheaval in the UK post-Brexit and the imminent general election has made some companies err on the side of caution. Financial software company Misys, for example, has reportedly pulled out of a planned float which was anticipated at the end of 2017. The same has also been reported for the multinational investment company Brait. Both companies have reportedly cited the potential volatility caused by the UK’s decision to leave the European Union as the reason for delaying their plans, [8] to float on the LSE, for the moment at least.

 

The British regulator, the Financial Conduct Authority (FCA) has also recently announced plans for an overhaul of the current UK IPO process to level the playing field across international markets by bringing the current UK system more in line with the US system. Our current system is based on an initial two-part process whereby an application is put forward to the FCA and also to the individual stock market. After the application has been submitted it is estimated to take around 6-12 months to complete. The FCA has stated that its reason for reforming the current system is mainly due to the timing and sequence of the process as well as the quality of the information provided to listing companies.[9] If the plans go ahead, companies listing on the LSE will have to release key information about their business earlier on in the process[10] which could give the company greater access to prospective investors, increasing the potential for greater IPO activity on the market.[11]

 

For the most part, IPO activity for the first quarter of 2017 has been positive and it looks likely that we are set to see a good year of listings in the UK. Whether this will continue beyond 2018 after the Brexit negotiations are in full play remains to be seen. However, for the time being at least, the downturn in the sterling appears to be working in our favour and the two-year process for negotiating a trade deal with Europe also gives ample time for further investment and listings on the LSE.

 

[1] http://www.ey.com/Publication/vwLUAssets/ey-global-ipo-trends-q1-2017/$FILE/ey-global-ipo-trends-q1-2017.pdf

[2] http://www.ey.com/Publication/vwLUAssets/ey-global-ipo-trends-q1-2017/$FILE/ey-global-ipo-trends-q1-2017.pdf

[3] http://www.investorschronicle.co.uk/2017/04/27/shares/news-and-analysis/london-competes-for-investor-cash-XMG2HBosC4ZAa31ZK0hBmM/article.html

[4] http://www.ey.com/Publication/vwLUAssets/ey-global-ipo-trends-q1-2017/$FILE/ey-global-ipo-trends-q1-2017.pdf

[5] http://www.ey.com/Publication/vwLUAssets/ey-global-ipo-trends-q1-2017/$FILE/ey-global-ipo-trends-q1-2017.pdf

[6] http://www.cnbc.com/2017/03/01/saudi-aramco-listing-who-will-win-the-worlds-biggest-ipo.html

[7] http://www.cnbc.com/2017/03/01/saudi-aramco-listing-who-will-win-the-worlds-biggest-ipo.html

[8] http://www.investorschronicle.co.uk/2017/04/27/shares/news-and-analysis/london-competes-for-investor-cash-XMG2HBosC4ZAa31ZK0hBmM/article.html

[9] https://www.fca.org.uk/publications/consultation-papers/reforming-availability-information-uk-equity-ipo-process

[10] https://www.ft.com/content/3f17aeb0-fe9a-11e6-96f8-3700c5664d30

[11] http://www.ey.com/Publication/vwLUAssets/ey-global-ipo-trends-q1-2017/$FILE/ey-global-ipo-trends-q1-2017.pdf

 

This article was first published on Insider Media on the 17th May 2017.

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