More challenges ahead for IPOs in 2022
Despite a strong start to the year, companies listing on the ASX for the first time have been hit by the broader share market downturn, creating concerns for investors.
Initial public offerings (IPOs) are facing an increasingly challenging environment, reflecting the macroeconomic, with factors such as inflationary fears, geopolitical instability and interest rate rises affecting markets worldwide.
In the first six months of 2022 there were just 59 new IPOs in Australia compared to 61 in the same period in 2021. The second half of the 2021 year saw 130 new listings.
In addition, there has been a significant fall in the amounts raised via IPO so far in 2022. Total amounts raised have been particularly impacted by the lack of large cap listings (those with a market capitalisation in excess of $100 million) with only five new large cap entrants in this segment of the market so far this year compared to 46 new listings across 2021.
While we usually see more listings in the second half of the year than the first half, at this stage it seems unlikely that the IPO market in 2022 will come anywhere near the amounts raised, or number of listings, that we saw last year.
The challenging environment is likely to continue in the second half of 2022, and notably the pipeline for IPOs - that is, the number of companies that have registered a listing date with the ASX at June 30, 2022 - is significantly down on the same time last year. In addition, the amount they are seeking to raise is just $121 million, compared to $1.25 billion at the end of June 2021.
Another trend likely to continue in the second half of the year is the dominance of the Materials sector.
In the first half of the year, it represented a total of 44 out of 59 new entrants. Gold projects prevailed, with 21 of the Materials listings holding gold projects. In addition, multiple listings held projects with a focus on lithium, nickel and cobalt prospects, reflecting the increasing global demand for battery metals.
At the end of June, the resources sector again dominates the pipeline, with 12 Material companies and one Energy company set to list, representing 87% of proposed new market entrants.
The average amount sought through an IPO by these companies is just $6.8 million reflecting the typical small-cap composition of new entrants from the resources sector. Battery metals, including copper and nickel, remain popular commodities with eight of the Materials companies holding projects for these metals. A total of four upcoming listings hold gold projects and two proposed listings hold lithium projects.
However, while it remains a difficult environment for new companies, it's not all doom and gloom for investors. Overall, new entrants to the market outperformed the broader market, albeit only slightly. The average loss of new market entrants at the end of the period was 10%, compared to the 13% fall in the ASX All Ordinaries Index, from 7779 at the start of the year to 6747 by the end of the period.
The average first-day gain of new market entrants was relatively healthy, and similar to that seen in the more stable days of 2021. However, these companies struggled to sustain these gains and by the end of the six-month period, only 32% of IPOs achieved an overall gain.
Overall, the IPO market looks uncertain, reflecting broader market weakness. As always, any fall in the share market will inevitably affect both the number and size of IPOs for the remainder of 2022 and potentially into 2023. Investors would be wise to keep a cautious eye on the market - while there are opportunities, there are also risks, particularly with new companies.
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