Sunday, June 17, 2012 / The Analyst / Proshare Research
 

Initial Public Offerings (IPOs) always held out an attraction for capital markets – for one, it is the clearest indicator of a performing regulator focused on market development and linkages between the economy and the bourse.
 

At its core, it validates the foundational premise that the capital market represents the most important platform for raising cheaper funds for business to fund expansion and build a nation.
 

This premise is changing. Indeed, the role definition of the capital market has been expanded as we have sounded often and the Nigerian market must recognise this and configure it into the changes taking place to be able to truly reposition the market.
 

Flashback to 2006 – 2008 when IPO’s were virtually dropping from the sky; albeit under a poor regulatory environment  - a position exploited by the market elite, who took advantage of the enthusiasm of investors and the compromised regulatory structure to exploit the boom.

By 2008 when the crash occurred, the IPO market has not been able to make any recovery. The investing public has little confidence in such as most are now trading at N0.50k, delisted or facing going concern issues. The fact that the regulator failed the investor, did not undertake any post offer/listing assessment and sanctioned no one for professional responsibility – the confidence, trust and integrity of the vehicle is compromised.
 

However, the reality with the IPO market is not just a function of our peculiar irresponsibility. Globally, the appetite for IPOs has flagged in many nations’ economies as well.
 

After years of holding the top spot for the amount of money raised from initial public offerings world-wide, Hong Kong's stock exchange's hold on new shares has dropped sharply this year. So far in 2012, Hong Kong is in eighth place, with $1.4 billion raised through IPOs on its exchange, down from its position as No. 1 in the past three years.  According to the Wall Street Journal, the Nasdaq Stock Exchange, New York Stock Exchange and Shenzhen-Chinext are currently in the top three slots.
 

Early in 2012, 24/7 Wall St. evaluated and compiled a list of top IPOs to watch for in 2012 . The highly pitched Facebook offer, touted as the mother of all tech IPOs made the list; is still on a continuous southward move since listing .
 

The question now becomes legitimate to ask - Will the Facebook offer kill the IPO market for 2012  ? . Only time will tell as the stock which was listed at $38 IPO price has gone down by $10.6 to $27.4 as at 12^th June, 2012, representing a loss of -27.89% in a matter of weeks.

Other Comparative Examples across the Globe

The Brazilian market, well known for its boisterous level of IPO activity is reportedly facing a hard year.
 

Recent reports affirm that European stock markets are open for deals again after an eight month drought but with investors still hurting from last year's poorly performing flotation’s and many companies not expected to be ready until later in the year, the recovery may be slow as an intensifying euro zone debt crisis rattled stock markets and investors.
 

Germany may be the strongest country in the troubled euro zone. But it has a whole host of its own problems. The country's erstwhile strengths have now become its major weaknesses. Exports currently form over 40% of its GDP. German exports will thus be affected as Europe forms about 60% of its market. A Greek default by itself would result in direct losses to Germany of about £90bn. These potential losses would increase rapidly as more countries default in the euro zone. Germany's debt levels are about 81% of GDP. This is expected to remain above 60% for many years, and slowing GDP growth will not help matters much.
 

Spain, Europe’s fourth largest economy, asked finance ministers from the 17 euro zone countries to rescue its banks, which have been crushed by bad land and property loans. The bailout was reported to have soured investors’ sentiments just hours after European and Asian stock markets were buoyed by a massive 100bn euro debt deal. 
 

Looking Inwards - Nigeria

Back to the Nigerian IPO Market, a brief look at forty (40) stocks listed between 2008 and 2010 reveals that thirty-seven (37) out of those stocks are trading below their listing prices while the remaining three (3) is trading otherwise. Twenty-one (21) of such stocks are currently trading at the nominal price of 50kobo.

The Nigerian IPO market can simply be described as technically and realistically dead since 2009 till date; as the market is yet to witness any traction since the meltdown of 2008.
 

The manufacturing company listed in Feb, 2012 by the new management at the NSE is yet to witness any price movement since it was listed.
 

This lack of no activity on the stock can be attributed to market confidence crisis driving the sentiments and low investors’ confidence which continues to permeate the market.
 

The Exchange is about to witness it second listing in the year and also since downturn. It offers less hope for optimism. The necessary regulatory approval has been given by the authorities for the listing of the financial firm.
 

Will there be a revival in the IPO market?

No – it will not. The confidence issue goes ahead of any analysis.
 

For instance, companies asking for astronomical prices are not going to find any takers. Especially when the global economic environment is so uncertain. But if companies with good business fundamentals come out with issues at reasonable prices, there is no reason why investors should not put their money in them.
 

Second, the high level of infractions that remains unresolved is an albatross.
 

The Exchange is however optimistic that IPOs are expected to become major aspect of the Exchange as from the end of this year 2012. In addition, it said new guidelines evolved by it will begin to boost initial public offerings as evidence of return of investor confidence in the market just as things were beginning to look up for the market and activities would return to the primary market by the end of the year. 
 

Closing Thoughts

The once-hyped market for initial public offerings may not recover as swiftly as some financial players have been expecting. An unpredictable economy and the risk of overpriced deals scare investors away. IPOs have languished in the past two years as prices sank for many names that went public.
 

While most markets have gradually continued to recover from the global financial crisis of 2008, IPOs remain out of favour. Just as well, IPOs can be a risky investment under these conditions and the market has to confront the ‘chicken or egg’ dilemma it has found itself.
 

Individual investors clamouring for an immediate return to a bubbling IPO market are equally cautious given the tough climate and the inability to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company.
 

For us in Nigeria, an opening may yet exist should we find the political will to advance a growth inclusive economic model for the rebirth of the capital market by encouraging through regulation backed incentives; the linkage between growth sectors of the economy, addition of privatised entities and new PPP structures with the capital market.
 

Indeed, we have a unique opportunity to create a bottom-up restructuring of our market to eliminate ‘hot money’ and a ‘preponderance of speculators’ from our market and usher in a new era.
 

Time is however running out for a decisive action that will halt the drift.
 

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