The pipes of the Spanish stock exchange are dry. A few weeks before the end of the first half of 2020, no company has dared to make the leap to the national stock market And, what is more worrying, none of them is willing to try it in the coming weeks. The scourge of the coronavirus knocked down the claims of the few groups that seemed open to exploring a placement of their shares in the markets and the accelerated recovery that the stock markets have been leading in recent weeks has not yet been enough to reactivate those intentions.’A priori’ does not seem illogical. The covid-19 crisis has represented an extraordinary situation, in which companies are still showing today unable to measure the actual impact on their business prospects and in the markets, valuations seem to have lost all connection with fundamentals. Such circumstances have led to a drought of IPOs that is not exclusive to the Spanish market: despite an incipient recovery in recent weeks, the flow of operations announced globally in 2020 is reduced, according to Bloomberg records, to just 614, with a market value of around 41,690 million euros. This figure would have to increase almost 140% in the remainder of the year to avoid becoming the least active year of the millennium.
But it would be a mistake to attribute the drought of IPOs in Spain to the coronavirus crisis. The situation comes from afar. If in 2017 the number of premieres in the Spanish parquet was limited to 6, a year later this figure was reduced to 5, to be reduced in 2019 to just one (and not even a debut to use, since it was the jump of a company from the MAB to the main market). Far are the figures for the years 2006 or 2007, when the national park bell welcomed up to 25 different companies.
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“The activity of IPOs in Spain has been negatively impacted in recent years by the national uncertainties, derived from the lack of government, as well as the international geopolitical tensions (trade tensions, Brexit, oil prices …), which have increased the volatility of the markets and have increased the uncertainty about the projection of the results of the companies, an aspect that is of great relevance in the valuation of companies in the time to go public, “explains Rosa María Orozco, partner in charge of EY’s IPO.
According to this vision, the political instability that has affected Spain in the last five years, and which involves, among other issues, high regulatory uncertainty, would have been added to a series of more global realities to discourage companies’ interest in going public.
And the truth is that also globally it is possible to see a downward trend in the number and amount of IPO transactions for years. If in 2007 a record was reached, with some 3,000 operations, valued at around 350,000 million, 2019 figures barely reached 2,000 stock releases, with a value of only 229,430 million euros. In between the swings have been constant, but with an indisputable decreasing trend.
Globally, IPOs reached 230,000 million in 2019, very far from the record of 350,000 million that was recorded in 2007
Behind this phenomenon, many experts detect the emergence of a growing number of viable financing alternatives outside the stock market, among which the role of venture capital. “Private capital has replaced the Stock Market as a natural instrument to obtain liquidity, private capital managers currently have different pockets that adapt to almost any structure and time horizon, which allows us to offer any company a solution according to their needs, “explain the managers of Altamar Advisory Partners, the Altamar Capital area in charge of financial advisory, corporate finance and M&A issues.
The increasing role of these funds, with a growing financial power, it would be encouraging an increasing number of companies to look for in them the financing that in other circumstances they would have tried to obtain through the stock market. In this way, they obtain the necessary funds for their projects, with the support of groups that usually play an active role in management and professional advice, and save some of the most burdensome requirements of listing on the stock market, such as those related to reporting, transparency or complexities of the relationship with numerous small shareholders, that in more than a few cases have ended up giving rise to costly legal disputes.
Volume of the IPOs announced each year from 2000 to June 6, 2020, in millions of euros. (Bloomberg)
In Spain there are several cases of groups that, after exploring the IPO option, ended up opting for the way of entering a new private shareholder in their capital. It was the solution given by Telefónica to its subsidiary Telxius, or the path followed by Cepsa or Maxam after ruling out the public sale of its shares. In 2019 alone, private capital in Spain invited some 8,890 million euros, according to Capital & Corporate data. These figures represent record levels, after rise 49% over the previous year and triple the volumes recorded in just five years.
The abundance of liquidity in the markets in the last decade has allowed these funds to endow themselves with a very pronounced financial power that has helped them design different structures capable of satisfying the different demands of a great variety of companies and offering unas valuations with which, in many cases, the market has been unable to compete.
This has an effect not only on the IPOs, but also on the growing number of companies leaving the floor after being acquired by private equity vehicles. The case of MásMóvil, after the recent offer from KKR, Cinven and Providence, could become one of the most notable of recent times, if it ends up bearing fruit and they manage to get the operator out of the parquet. But there are numerous additional examples to this. In the last year alone, Bodegas Bilbaínas, Telepizza, Natra or Reunited Parks They have taken the way out from the parquet, after being acquired by different private funds.
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In the Spanish market, which in 2007, it registered up to 166 companies in the Continuous MarketToday, there are barely 129 remaining. And the situation is much more eloquent in large markets such as the United States, where the number of listed companies has been reduced to more than half in just over two decades.
In this sense, the case of the Wilshire index 5,000, a general index of the US stock market, so named when it was launched in 1974 by the approximate number of companies it should include. After reaching a maximum of components in 1998, when it counted more than 7,500 members, their number has been dizzyingly reduced, so that it has not had at least its intended 5,000 members since 2005 and today it amounts to just under 3,500 Business.
It cannot be ignored, however, that the shortage of listed companies in the Spanish market in relation to its economy is striking, as illustrated by its comparison, for example, with that of Sweden, a country with an economy 60% lower than the Spanish one, but that adds more than 360 companies listed in its stock market, with a total market value close to one trillion euros, compared to the 650,000 million euros of approximate capitalization of the companies that make up the Spanish Stock Market.
Despite the fact that its economy is 60% lower, the capitalization of the Swedish stock market exceeds the Spanish one by around 300,000 million
“The nature of our business fabric, mainly made up of SMEs, makes our country less likely than others to go public. And it is that apart from having a business history, with a sustainable growth plan that is attractive to investors and with professionalized management, the average size of companies that decide to go public is getting bigger and bigger worldwide “, explains Orozco.
From a very active firm in the IPO market, they point out that many international institutional funds, whose role is essential when it comes to successfully placing a company on the stock market, usually require minimum investment levels of up to 30 million euros which, at the same time, should not represent a high percentage of the group’s capital.
The need to have sufficient levels of liquidity to, if necessary, be able to undo the investment in a relatively fast time, leads investors to demand levels of free-float (the capital that is freely traded on the stock market) from, to less, 200 million euros. There are not so many Spanish companies that can aspire to these figures. In fact, almost a third of those listed on the Spanish market today have a total market value of less than 200 million.
Operations carried out by private equity firms in Spain.
Javier Fernández-Galiano, director of Deloitte’s Financial Advisory, who also points to the lack of stock market tradition among Spanish companies and the traditional recourse to bank financing, highlights that “the evolution of MAB it has not helped small or medium-sized companies go public. ”
This market, created almost three decades ago to offer SMEs an intermediate market where they can prepare for a subsequent leap to the main market, hardly has success stories in this process during this period. And some fiascos, like the one that led to the discovery of the Gowex fraud, have been for years a macula difficult to erase. It is true that, unlike the main market, MAB has experienced in recent years a significant increase in its members, with 22 additions in 2019 alone.
But it cannot be ignored that the vast majority of these respond to the only requirement that the Socimi have to go out on the market, without pretending to generate liquidity, and that, despite the intense growth of recent times, the volumes of liquidity and financing that is channeled through this market are still very limited. Giving a boost to this secondary market to encourage small and medium-sized companies to enter the market is one of the levers that experts consider key to growing the Spanish stock market in the medium term and encouraging the development of a larger, stronger and more diversified financing business fabric, which would redound to the benefit of the Spanish economy.
BME works with ASCRI to develop strategies that allow private capital to see on the stock market a priority route for their divestments
From the manager of the Spanish Stock Market, BME, they also explore different ways to encourage jumping into the park. “BME works on different national and European initiatives to promote IPOs as a way to promote greater competitiveness in the European economy,” explains Domingo García-Coto, director of the BME Research Service. Among other measures, García-Coto highlights the work being carried out with ASCRI, the Spanish Association of Venture Capital, to analyze joint strategies to make IPOs a priority path for divestment for venture capital funds.
However, this does not seem like an easy task, at least in the short term. As explained by the Altamar Advisory Partners team, the sale of their investments through the stock exchange presents notable drawbacks for venture capital funds. On the one hand, because the process, which lasts for several months from the time it is announced until it is executed, involves exposing yourself to considerable market risk which can affect valuations or end up truncating operations. On the other, because stock investors tend to be more sensitive to some leverage metrics, which these funds tend to push to more extreme limits. And finally, because this route hardly allows a complete divestment, but by tranches, which further exacerbates market risk.
In the short term, this exercise aims to have very poor results regarding IPOs
These drawbacks reach more relevant proportions in situations of high volatility and uncertainty such as that experienced by financial markets in recent years. “When economic prospects are uncertain, private equity firms prefer strategic outlets to the public sale operations, because they can sell cleanly their total participation in the asset. It is months or years before private equity funds can fully exit an investment through an IPO, given blockages that restrict how much and how fast they can sell. Therefore, it is not surprising that the IPO count has decreased again in 2019, reaching a minimum of 10 years, “notes a report by Bain & Company.
All this, together with the uncertainties still existing due to the coronavirus crisis, make it very difficult to foresee a rapid turnaround that will end the IPO drought that affects the Spanish market. “In the short term, unless we see a rapid recovery in the markets that could give rise to some IPO project for the second half of the year, this exercise aims to have very poor results“warns Fernández Galiano, who does trust, however, that” this situation will tend to change in the medium term and we will see more IPO projects. ”
It will be necessary to wait until then for the bell of the Spanish Stock Market to ring again welcoming a new member.