China, Technology and Private Equity to Drive IPO Activity in 2010

The Ernst & Young Institutional Investor IPO survey 2009 highlights the likely markets and sectors that will lead listing activity in 2010. The survey, based on responses from more than 300 institutional investors around the world, found that China, technology and private equity are likely to drive IPO activity over the next 12 months.

IPOs in Emerging Markets Set to Recover First From the Economic Downturn

Investors believed a handful of IPO markets worldwide would show recovery by the end of 2009. China (75% of respondents), India (57%) and Brazil (57%) were highlighted as the most likely with the U.S. (31%) and Singapore (30%) suggested as other possibilities. Ernst & Young’s quarterly data has shown that this trend has already started in Q3 2009 and is likely to continue in Q4.

For many developed markets like the U.K., Australia and Germany (all 57%) and Canada (62%), investors believed domestic IPO markets will start to recover between Q1 2010 and Q2 2011. A surprisingly large number of investors (up to 42%) in France and Japan thought a recovery could be more than 18 months away.

Greg Ericksen, global vice chair, Strategic Growth Markets at Ernst & Young, comments: “Recent IPO activity in the last two quarters confirms that some IPO markets are making an early recovery, notably in the emerging economies of China, India and Brazil. China-based companies in particular have been significant in driving recent capital market activity, with more deals than North America and Europe combined. Although the rest of the world appears to be picking up, full recovery will take longer and we don’t expect markets to stabilize for another 12 months.”

Top Five Industry Sectors Expected to Recover First

Forty-nine percent of investors believe that the technology sector will lead IPO recovery globally, followed by financial services (43%), the oil and gas sector (38%), metals and mining (35%), and consumer and retail (32%).

Ericksen says: “Technology companies often lead IPO recovery because they are perceived to have good market growth opportunities. While it is not surprising that investors show an interest in mining and oil companies -- given the rise in asset prices -- it was unexpected to see a similar focus on financial services companies. However, we’ve started to see financial services companies stabilize. Those that have survived the economic downturn are now in a better position to attract investors than they have been for some time.”

Private Equity to Lead the Way

Investors forecast a variety of different types of companies in different jurisdictions, looking to float over the next year. Private equity-backed companies are predicted to go public first in the U.S., according to 47% of the respondents, U.K. (45%), France (35%) and Germany (33%).

“Private equity-backed companies are playing a significant role in driving public offerings, and given the backlog of companies awaiting exit within their portfolios, they are poised to increase in importance,” says John Harley, global private equity leader at Ernst & Young.

Top Financial Factors Leading to IPO Investments

The top financial factors for making an IPO investment were debt-to-equity ratios, highlighted by 63% of investors surveyed. This was a dramatic rise from ninth position in the 2008 survey to first position this year. Other top factors include EPS growth (59%) and sales growth (55%).

“Investors are looking for less-risky investments, which means that they are more concerned with debt-to-equity ratios and invest in companies that performed well in the downturn and are able to service their interest and debt. When the market returns, investors will require a track record of significant growth,” concludes Ericksen.

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, its 144,000 people are united by shared values and an unwavering commitment to quality. During September 2009, Ernst & Young conducted an online survey among 305 respondents from the U.S., Asia, Latin America and Europe (data source: research unit of Institutional Investor Magazine). More than half of the respondents were asset managers from hedge funds, mutual funds, pension funds, private equity and banks.