Survey: China, Technology, Private Equity Will Drive 2010 IPOs

by Leroy Baker, Tax-News.com, New York

12 November 2009

China, technology and private equity are likely to drive IPO activity over the next 12 months according to the Ernst & Young Institutional Investor IPO survey 2009, which highlights the likely markets and sectors that will lead listing activity in 2010.

The survey, based on responses from more than 300 institutional investors across the world, indicated that a handful of IPO markets worldwide would show recovery by the end of 2009. China (75% of respondents), India (57%) and Brazil (51%) were highlighted as the most likely, with the US (31%) and Singapore (30%) suggested as other possibilities.

For many of the developed markets like the UK, 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 minority of investors in many major markets – in France and Japan up to 42% – thought a recovery could be more than 18 months away.

Greg Ericksen, Global Vice-Chair, Strategic Growth Markets at Ernst & Young, said: “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.”

49% 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 added: “Technology companies often lead IPO recovery because they are perceived to have good market growth opportunities … but it was unexpected to see a similar focus on financial services companies. Those that have survived the economic downturn are now in a better position to attract investors than they have been for some time.”

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 US, according to 47% of the respondents, the UK (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.

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 mean 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," concluded Ericksen.

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