By: Bailey McCann, Private Equity Strategies
According to a new Ernst & Young survey, investors cite brighter earnings, improved macro-economic conditions and more stable equity markets as the reasons for the improved market sentiment. Private Equity Strategies spoke with the author of the survey, Maria Pinelli, Global Vice Chair of Strategic Growth Markets at Ernst & Young, about the results and what that could mean for the IPO market this year.
Some 4 out of 5 institutional investors invested in an IPO last year, that’s up from only 1 in 5 in the past two to three years. This data is especially notable in light of the high profile failure of the Facebook IPO last year. This trend is expected to continue throughout 2013, although Pinelli notes that companies are going to have to make a significant effort to stand out, as it is a buyers market.
“The price has to be right, the terms have to be exactly right and the management team has to be right, for a company to see investment in this buyers market,” Pinelli tells Private Equity Strategies.
Earnings outlooks are critical, according to the survey, “Investors in almost every region rank a brighter earnings outlook as the key driver for improving IPO market sentiment. “ In Asia, confidence is particularly strong as both private equity and venture capital are looking for opportunities in this market - and there are many deals to be had. Companies may find it difficult without strong numbers, and a core differentiator to break out ahead of what is a considerable opportunity set.
In North America, it may be slightly easier for companies as investors are looking more closely at stabilization of macroeconomic factors before investing. Companies may be able to benefit if Congress moves toward a budget agreement. Report data shows that as these decisions are made and the overall financial landscape in the US becomes clearer, investor sentiments are likely to fall in line with the rest of the world - meaning North American investors will too be in the market for deals.
Good quality companies have generally been able to be successful in the IPO market. However, the survey shows that now more than ever, even good companies will have to take careful consideration of factors including market timing, and picking the right point in the lifecycle. “We have seen companies that rush to go public, or fail to take into consideration all of the appropriate factors come away unsuccessful. Recovery from something like this can be considerable,” Pinelli says.
She says that companies need to ensure that they have a solid infrastructure in place before going to market. Data in the survey shows that a number of companies that list too early also tend to have holes in infrastructure areas like reporting, corporate governance or compliance. Nearly one third of investors in the survey cited a strong corporate infrastructure as one of their core concerns.
“Investors want to see quarterly reporting, they also want to have transparency and know that a company is going to deliver on their promises,” Pinelli says. “It’s impossible to predict everything, but surprising investors can cause a significant drop in market value and it can take up to three years to regain that credibility with the public.”
*Image Source: Right team, right story, right price - Survey - By Ernst & Young
This article was published in Opalesque's Private Equity Strategies our monthly research update on the global private equity landscape including all sectors and market caps.