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Does volatility affect IPOs?

Guest DanielaIG


The music entertainment arm of Tencent, which has 800 million users across a variety of platforms in China, had originally planned to go public in the United States imminently. The IPO was initially set to launch as soon as this week but has now reportedly been delayed because of the recent global sell-off. It is not the first company to pull out or postpone an IPO in the recent weeks, and whilst Tencent have declined to comment on the decision, it’s likely to be on the back of volatility seen in the equity markets.

Companies prefer stable market conditions to launch their IPOs because they are more likely to be able to correctly predict their valuation and generate the required funds. They usually have a set figure they are trying to raise and offer shares accordingly. If market conditions are stable, companies are more likely to be able to predict if their target value is likely to be raised.

In volatile markets, like the one experienced last week, market perceptions on financial stability and future economic conditions start to show. If the most important stock indices suddenly drop, there is a consensus that future economic stability might be in jeopardy. Company’s futures are questioned and therefore the perception of such are hindered. If investors have doubts about the future of a company’s operations and earnings capacity, they are less likely to devote a part of their capital to such company.

Volvo (owned by the Chinese multinational automotive company Geely) have also recently backed out of an IPO, stating that the ongoing trade wars are to blame. Volvo exports vehicles from China to the US and is therefore at the centre of the tariffs to be imposed by the US government on Chinese goods. The reasoning is clear, tariffs on their car exports are going to affect the company’s ability to generate earnings. Therefore, investor’s sentiment towards Volvo will have worsened, meaning that if the company launches an IPO, the value they will place on the shares will be lower.

So why did Aston Martin decide to go forward with its IPO earlier this month? Well, the primary reason is the fact that they are a UK based company, meaning that they are not at the centre of the trade wars currently taking place between the US and China. This does not mean that they are free from turmoil, as worries over Brexit and US tariffs on EU cars are still concerning to investors. What also helps is the diversification seen on their order book. Whilst the UK remains their biggest market seeing 30% of sales, mainland EU sees 25%, with APAC and the US seeing 24 and 20% respectively. Geographically diverse revenue streams should have helped dampen these worries, resulting in Aston Martin making its market debut on the 3rd of October. We didn’t see that on IPO day, with investors less than willing to match the valuation. The share price has been moving down from its initial opening price of £19, shedding over 20% in the first couple of weeks trading. Not a great result.

When we look at volatility vs the number of IPOs over a 15 year period we can see a correlation between the two. Of course you’ll have outliers, and whilst a company can benefit from launching in a volatile market, generally the lack of uncertainty and an increase in volatility reduces that.


Souce: Renaissance Capital

When we look at the specific case surrounding Tencent Music, we can see that Tencent Holdings dropped with the rest of the market on Thursday, from around 286 to 268. On a longer time frame Tencent have come off nearly 18% in October alone, and whilst some of that price action has recovered it does beg the question: is it really a good idea to launch your IPO when your market value has dropped so suddenly? What if the opposite happened, would it be more favourable to launch an IPO if your share price has suddenly risen?



Source: IG Dealing Platform

Put simply there is still volatility in this situation, and there is a lot of movement going on in the market. Predictions on how to accurately value a company, irrespective of buy side or sell side volatility, are far harder, making an IPO far less likely.

There are a number of IPO guides out there which can make for interesting reading, and a very good blog post from an ex-president of NYSE Group, Tom Farley. Whilst he does lay out obvious requirements such as having the right executive team on board, a good business case for going public, and good audit processes, a number of other factors come down to accuracy and forward looking speculation. A clear strategic roadmap, a realistic valuation, and an accurate financial forecast performance all rely on a calm landscape. All of these things become exceptionally harder during times of high volatility.

With the recent spikes in the VIX there’s an argument that says companies should hold off on their IPO. With that said each new proposed listing should be viewed on a case by case basis. You can register your interest for upcoming IPOs with IG to make sure you’re kept in the loop here. https://www.ig.com/uk/investments/share-dealing/ipos Any questions, please feel free to add them below. 


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