Equity underwriting revenues at major US and European investment banks are set to rebound in the second half of 2023 as IPO activity recovers.
While global IPO activity remained muted in the first half compared to a year ago, the aggregate value of deals in the second quarter rose from the previous three-month period, S&P Global Market Intelligence data shows. The value of equity capital market (ECM) transactions in the period also grew for the first time since early 2022, fueling banks' hopes that market fortunes might be turning soon.
Sector observers also see reasons for optimism with central bank rate hikes nearing a peak, market volatility easing and economic headwinds lessening. IPO volumes have been declining since early 2022 amid monetary tightening and economic and geopolitical uncertainty, hitting banks' ECM revenues, with some of the largest global players booking drops of 80% or more last year.
"As the economic themes have begun to improve during the opening six months of 2023, we've begun to see the IPO pipeline build, with some notable new listings that have performed well," said Matt Toole, director at the deal intelligence unit of the London Stock Exchange.
Bank revenues rebound
ECM revenues at Bank of America Corp., Barclays PLC, BNP Paribas SA, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, JPMorgan Chase & Co., Morgan Stanley, Société Générale SA, UBS Group AG and Wells Fargo & Co. rose to $2.7 billion in the first half from $2.4 billion in the prior-year period, according to data from Coalition Greenwich, a division of S&P Global-owned CRISIL.
ECM and IPO revenues at the 12 largest global investment banks are expected to rise in 2023 from the decade-low level observed in 2022, said Eric Li, research director at Coalition Greenwich. Despite higher rates and remaining market uncertainty, there are "very supportive" underlying dynamics that point to better business in 2023, said Li.
"We do expect the industry revenues as well as volumes to recover," he noted. The level of ECM revenue growth is hard to predict and could range from zero to 20% or more, depending on how much activity is seen in the second half, Li said.
Second-quarter ECM revenues grew at most of the top global investment banks on both quarterly and yearly bases, company filings show. Revenues from follow-on deals and convertibles offset some of the IPO weakness in the quarter, with "encouraging signs that equity and equity-linked markets were opened at times for regular weight issuance," Morgan Stanley's CFO Sharon Yeshaya said on a July 18 earnings call.
Signs of recovery
US IPO activity, which has been a major drag on global activity since early 2022, showed signs of recovery in the second quarter, with the total IPO value raised in the region tripling against the first quarter. This was due to larger deals coming to market, including the $4.40 billion spinoff of Johnson & Johnson's consumer health business, Kenvue Inc., Market Intelligence research shows.
In Europe, the number and value of deals grew quarter over quarter. Activity is still subdued, yet "the IPO pipeline in Europe continues to grow and issuers are spending more time preparing for their potential listings," PwC said in a regional IPO report for the second quarter.
The IPO pipeline in the US is likely to unlock earlier than that in Europe, said Jacques-Aurélien Marcireau, co-head of equities at Edmond de Rothschild Asset Management. Given their faster cash burn rates, US companies will return to the market sooner, Marcireau said.
Activity in China and the Middle East, which was more buoyant than elsewhere in 2022, will help drive global activity in 2023 as well, according to PwC. The number and total value of IPOs in China grew in the second quarter on both quarterly and annual bases, Market Intelligence data shows.
Overall equity issuance activity, including IPOs and follow-on deals, is also on the road to recovery. The total value raised via ECM transactions in the second quarter reached $77.39 billion, rising 28.8% from the first quarter, Market Intelligence research shows.
Global follow-on deal value grew quarter over quarter, although the number of deals declined.
In the pipeline
Among the most notable IPOs in the pipeline is UK chipmaker Arm Holdings PLC, whose mooted September float in New York could generate up to $10 billion in proceeds. German footwear brand Birkenstock GmbH & Co. KG could also list in the US in the same month with a valuation of more than $8 billion, Bloomberg News reported.
In Europe, private equity firm CVC Capital Partners Ltd. is reportedly considering a listing in Amsterdam later this year and is also working on a possible €7 billion IPO of portfolio company Douglas Holding AG in 2024.
Even with a number of big ticket listing in the works, ECM activity is expected to rebound slowly. "While companies with strong equity stories and reasonable valuation expectations should be able to tap the market, the sentiment amongst the investment community points to the deal activity picking up only in 2024," PwC said.