Insight & Analysis

Public market entrants face varied challenges

Published: Jun 2024

Companies looking to raise funds by going public over the coming months are likely to face bumps in the road regardless of where they look to list.

Lots of people crossing the road at zebra crossing

In the US, investor optimism propelled stock markets to reach all-time highs earlier this year with PwC referring to a solid pipeline of companies waiting to go public – although a lot of this growth in market valuation has been down to the strong performance of a small number of mega-cap equities with exposure to artificial intelligence.

Doug Chu, Capital Markets Advisory Leader at PwC US notes the debt markets have benefited from a positive market tone and the bond markets picked up with issuers receiving favourable rates compared to those seen this time last year. He says there have been signs of increased risk tolerance from investors as banks have become more aggressive, fuelling increased M&A financing in the syndicated debt markets and more favourable pricing.

However, Bank of America analysts noted earlier this month that their clients had been large net sellers of US stocks since the beginning of May. In his annual shareholder letter, J.P. Morgan CEO Jamie Dimon noted the number of public companies should be much higher (it is estimated almost 90% of US companies with turnover in excess of US$100m are privately held), suggesting US investors may be starting to turn away from equities.

Yet all the major US indices were up in May, with the S&P 500 rising by 4.8%. In contrast, the UK’s Alternative Investment Market (AIM) has seen a drop in the value of some of its highest-profile companies as UK investors look to put their money into overseas companies.

“Whilst the AIM remains a key trading platform for many investors, the recent drop in its liquidity shows that more needs to be done to help keep UK stock markets as attractive trading and investing venues,” says Colin Wright, UHY UK Group Chairman and Partner. “It is essential that AIM maintains its draw to listed companies.”

According to Ben Yearsley, Director of Fairview Investing, the focus should be on reviving the AIM rather than creating new stock markets or developing other existing markets.

“One of the big problems the AIM faces is the continual chatter about inheritance tax relief on most stocks and whether it is really justified and the likelihood of an incoming UK government getting rid of the exemption,” he says. “Holders of AIM stocks for inheritance tax purposes must be a massive proportion of the market, running into billions of pounds.”

Yearsley suggests the revival process should focus on quality over quantity and that it might be time to impose a minimum listing size “as there are far too many very small companies on the AIM.”

The fundraising environment in Asia is also challenging due to dampening valuations and risk appetites for big-ticket funding rounds. A report from Bain & Company highlights stock market volatility in the region with public markets in most countries having limited appetite for IPOs on the back of patchy market performance and low valuations.

After a tough 2023 for Chinese stocks, there are two potential outcomes for the market this year. In a pessimistic scenario, China’s growth is disappointing and global bond yields rise, resulting in more declines for Chinese equities. In a more positive outcome, positive earnings surprises and lower global bond yields could set the scene for substantial gains from current levels.

“Chinese stocks have the potential to surprise on the upside if sentiment towards the market reverses,” says Herald van der Linde, Head of Equity Strategy Asia Pacific at HSBC.

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