Written by 11:08 Financial Centre, Member

DVFA Monthly Question: No Turnaround on the IPO Market in the Crisis Environment

DVFA Investment Professionals would like to see regulatory hurdles dismantled and a change in mentality among German investors.

The assessment of IPOs and the raising of capital by listed companies in an uncertain market and overall environment was the subject of the DVFA Monthly Question September. Only a few companies still dare to enter the stock exchange floor with a public offering. At the same time, there are always complete or extensive delistings. According to current estimates, 2022 will not be a good year for IPOs either.

The survey results, however, strengthen the view that it is not just the poor market environment that is to blame, but that structural changes are also necessary. “The traditional raising of capital by companies in the German market is undoubtedly fraught with a number of hurdles and risks. There is an urgent need, for example, for a regulatory streamlining in order to facilitate classic IPOs and not to overburden them with formalities. In addition, it seems advisable, also with the support of the regulator, to increasingly attract investor groups such as insurance companies,” Roger Peeters, DVFA board member, summarises the results.

IPOs almost come to a standstill due to Ukraine conflict and weak market situation

Asked about the reasons why the number of IPOs is declining, 38% of the respondents say that there is a coincidence of weak market conditions and structural issues. Accordingly, only a slight improvement in the frequency of IPOs is to be expected. The war in Ukraine has further aggravated the misery, say 32%. The German IPO market had already been difficult before and would probably remain so. 28% think that no company would venture an IPO project in this environment. With a calming of the situation in the East and an upswing, expectations are rising that more companies will come to the market again.

There is little optimism: Only 2% expect the next IPO boom to be imminent.

The reasons for the sluggish IPO development are manifold

DVFA Investment Professionals were asked about the reasons for the sluggish IPO development; multiple answers were possible. The results give a relatively evenly distributed picture of the reasons.

The investor group of insurers plays an important role and is in the lead: Due to increasing regulation, insurers have gradually withdrawn from the stock market in recent years (share quota currently around 5%, in 2000 still over 20%). This type of regulation should be urgently reviewed. This is confirmed by more than half of the respondents (54%).

48 % consider regulation to be a deterrent. Companies listed on the stock exchange, especially small and medium-sized enterprises, are regulated far beyond what is necessary with extensive regulations, for example on publicity. Close behind at 44% is the assessment that the risk-averse German mentality is the problem.

41% think that raising equity capital is not worthwhile because loans are still too cheap in comparison. Looking across the pond, exactly one third, 33%, believe that valuations in the USA, for example, are much higher than in Germany and that a listing on the German market is therefore not very attractive.

The role of alternative forms of capital raising – SPACs and ICOs fall through

Other ways of raising capital are not really in the DVFA investment professionals’ favour on the popularity scale. Queried was the view on Special Purpose Acquisition Companies (SPACs) and Initial Coin Offerings (ICOs).

“SPACs are pure children of the bull market; in normal markets, no investor invests in such black boxes,” says the clear majority of 86%. And the picture for ICOs is just as critical: ICOs and cryptocurrencies in general are modern Ponzi schemes and in no way sustainable or future-proof, according to 40%.

Only a meagre 7% consider SPACs to be an “ingenious concept”. It is a clever way to separate capital raising and investment, according to those who voted in this way. Likewise, only 7% warm to ICOs: they see ICOs as the future that will replace the current monetary system just like cryptocurrencies.

Porsche IPO: A possible liberation blow?

The market is eagerly awaiting Porsche’s IPO. The result of the survey is unambiguous: DVFA Investment Professionals are quite optimistic about Porsche’s listing planned for the last quarter of this year. 53% are convinced: the influence of Volkswagen and the accompanying banks is seen as great enough to make this IPO a success.

The critical voices, however, confirm the concerns. As many as 25 % believe that the IPO is not very realistic in the current environment. It will be postponed until 2023, possibly even cancelled. 20 % speculate that it will take place, but will not be a great success.

Only a small proportion of respondents see Porsche as an icebreaker that the market has been waiting for and after which a small IPO boom will set in (2%).

Note: The survey was closed on 31 August, i.e. before the concrete IPO planning that has become known in the meantime.

The future of capital raising requires streamlining prospectuses, rules and regulations

Which instruments can be useful to promote capital raising? Are there significant drivers? Multiple answers were possible.

Prospectuses, regulations (also after the IPO) and requirements need to be significantly streamlined. This means that regulatory issues are rated as significant by 61% of the participants. Slightly fewer think that there needs to be a change in mentality among all participants. Company leaders should become more risk-averse and investors as well (48 %). 44% see the legislator as having a duty – the current government has some good approaches in its coalition agreement that urgently need to be implemented. Investments in listed SMEs, for example, should be promoted by the state.

The vote for investment banks received the least votes with 29 %: The (investment) banks must do more and advertise more strongly to SMEs for this form of capital procurement.

"Our investment professionals do not see any real alternatives in SPACS and ICOs, but at least show confidence in the Porsche IPO. Even if it does not bring a breakthrough on the IPO market, this IPO could at least send a positive signal. The risk-averse attitude that is not entirely unjustly attributed to the Germans is likely to be difficult to overcome - just like the Ukraine war or the policy of cheap money as a cause, it can only be influenced in the medium to long term."

Source: DVFA

Cover Image: Unsplash

Translation by the Editors

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