Most commentators agree that the equity capital markets are not in robust health as we enter 2023. Investors have sustained significant losses in recent months and the combination of war, inflation and recession mean that investor confidence is at a definite low. There are however some signs that the outlook for 2023 may not be as bleak as the headlines might suggest.

Market Outlook

Whilst the markets have improved somewhat since the turbulent days of October and the short-lived Truss government, there remains a lot of uncertainty and volatility in the world which inevitably impacts on investor sentiment. The war continues in Ukraine; Inflation, largely driven by soaring energy and food costs, remains very high; and the Bank of England, the US Federal Reserve and other central banks are all expected to continue raising interest rates. The UK is already in a recession and the US and several other major global economies are expected to enter recession in 2023. So the outlook for the UK equity capital markets is far from rosy, but we believe there are some grounds for optimism, particularly in the second half of 2023.

Secondary Fundraisings

2021 was a busy year for the UK equity capital markets, particularly for IPOs. Throughout 2022 we saw investors move away from IPOs and focus on their existing portfolios. According to a recent survey by KPMG, listed companies are primarily focused on repairing or defending their balance sheets, with a number of respondents also actively considering raising funds for M&A as opportunities for consolidation present themselves. As interest rates climb equity is likely to be a more attractive source of funding than debt and, in our experience, investors will continue to support those existing portfolio companies with businesses and management teams they believe in.  We therefore expect the market for secondary fundraisings to remain reasonably active in the coming year. 

IPOs

The market for IPOs was muted in 2022, particularly in the second half of the year, and 2023 looks set to start in a similar vein. However, a number of banks are reporting reasonably healthy pipelines of companies interested in an IPO when market conditions improve. Again, higher interest rates will make equity a more attractive funding option for many companies, and companies which have managed to grow profitably despite the turbulence of recent months will likely appeal to investors as and when market conditions improve. Several commentators have expressed the view that when the next upward trend in the IPO cycle commences, investors will be concentrating on the quality of the companies involved rather than on specific sectors, but it does look likely that energy (particularly renewable energy or energy transition) will be a sector of particular interest. Market conditions will improve, but the key question is when?  A number of market participants and commentators have expressed high hopes for the second half of 2023, with companies looking to IPO before the summer break being potentially well placed to take advantage of an upswing in investor sentiment. Given it can quite easily take 6 months to prepare for an IPO, companies considering a listing should ensure that they are as well prepared as they can be for when the market turns.

Conclusion

Investor confidence is key to the equity capital markets and there is no doubting that this has been impacted by political, economic and social factors. Despite this, we expect the market for secondary fundraisings to remain reasonably active throughout 2023 as investors support their existing portfolio companies. We expect the market for IPOs to remain muted at least until the second half of 2023, but companies considering a listing would do well to prepare early so they are in the best possible position when market conditions improve, which they surely will.