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Report: expect 'healthy' deal market ahead of Brexit

Capital market activity is expected to be "healthy" ahead of the UK's anticipated departure from the EU in 2019, both in terms of initial public offerings (IPOs) and secondary offerings, according to a new report.29 May 2018

IPO activity on both the main market and the alternative investment market (AIM) of smaller, fast-growing companies, rebounded in 2017, compared to deals tracked in 2015 and 2016. This level of activity continued over the first three months of 2018, although the amount raised by companies during this period was less than half that raised in the first three months of 2017, according to the report, published by LexisNexis (57-page / 3.1MB PDF).

According to the report, 30 companies with a market capitalisation of £100 million or over carried out an IPO in 2017, compared to 12 companies in 2016. These companies raised a combined £7.1 billion, compared to just under £2.6bn in 2016.

The number of IPOs among companies of this size was slightly higher in 2015, with 38 IPOs taking place. However, these deals raised just over £6bn, far less than the amount raised by a smaller number of deals last year.

"Equity capital markets have enjoyed a considerable bull run since the global financial crisis in 2008, but that has not necessarily resulted in high or sustained levels of IPO activity," said corporate finance expert Jonathan Beastall of Pinsent Masons, the law firm behind Out-Law.com, who contributed to the report.

"The availability of debt finance at historically cheap levels of interest has had the overarching effect of fuelling the search for yield through equity investment which has driven the market up and has also rendered equity as an expensive source of finance for corporate activity. Coupled with this is the sensitivity of investors to political and economic bumps in the road which, against the backdrop of long term sustained growth in market values, can derail investor appetite for new issues," he said.

"2016 saw a couple of significant political bumps in the form of the Brexit vote and the election of Donald Trump as US president. It is pleasing to see that 2017 was characterised by a sense of recovery from these political upheavals and that this translated into greater IPO market volumes compared to 2016," he said.

Beastall said that the continued activity in the first three months of 2018 was "helpful in increasing market confidence", and that companies could be expected to take advantage of a continued period of relative stability before the UK leaves the EU in March 2019. UK markets should continue to be attractive to international investors due to the low value of the pound, he said.

"The pipeline for IPOs in 2018 looks to be healthy but may tail off towards the end of the year whilst the market pauses in anticipation of Brexit in 2019 unless, by then, there is a broad and optimistic consensus in respect of the forthcoming economic and political landscape. The same may be said about secondary market activity although should there be an increase in interest rates that might lead to equity becoming a more popular source of finance than at present. If an increase in interest rates led to an appreciation in sterling, UK companies might be tempted to increase their international M&A activity, which could lead to more secondary fundraisings to pay for that activity," he said.

Of those companies listing on the main market for the first time in 2016 and 2017, 62% included Brexit-related risk factors in their prospectuses, according to the report.

The largest proportion of companies listing on the main market for the first time in 2017 was from the investment and financial services sector, according to the report. These companies accounted for 56.7% of the total, an increase of 33.3% on 2016. The category includes real estate investment trusts (REITs), which were popular because they provide a steady source of income to investors, as well as special purpose acquisition companies (SPACs), which act as 'cash shells' to raise finance for future acquisitions through a public listing.

"Financial services are obviously of great importance for the UK following Brexit, and this finding is consistent with that of our own research into private equity IPOs for 2017," said corporate finance expert Rosalie Chadwick of Pinsent Masons, who also contributed to the LexisNexis report.

Investment and financial services companies were also the most active and highest-grossing in respect of secondary fundraisings, with over 75% of main market secondary offerings for over £10m taking place in this sector by 2017, according to the report. Placings were the most popular transaction type on the main market throughout the three-year research period, although their share has declined from 70.9% in 2015 to 61.8% in 2017. At the same time, placings combined with open offers have increased in popularity, up from 11.7% of main market transactions in 2015 to 16.7% in 2017.

Secondary fundraisings by AIM listed companies followed a broadly similar pattern according to the report; with placings accounting for 90% of secondary offers in 2015 and declining to 81.4% by 2017. Placings combined with open offers increased from 8.75% of AIM secondary fundraisings in 2015 to 18.6% in 2017. Combined main market and AIM deal volume remained fairly steady over the review period, although main market deals decreased in value while gross proceeds raised on AIM increased.

"It is perhaps not too surprising that secondary fundraising on AIM has increased as a percentage of total funds raised across AIM and the main market; AIM is a high growth market and therefore companies tend to have a slightly higher risk profile which is more conducive to equity investment than it is to debt finance and 2017 certainly saw an increase in investor confidence in companies," said corporate finance expert Julian Stanier of Pinsent Masons, who contributed to the report.