By Charlie Conchie
While the Bank of England may have plunged mortgage holders into another period of pain with its 13th straight interest rate lift today, some City investors are betting the move could provide an unexpected lift to the UK’s beleaguered public markets.
Investment bank Numis has wagered that a longer period of high interest rates could continue to scupper takeover financing for private equity firms and therefore make IPOs the go-to ‘exit route’ for investors.
Private equity firms rely on high-yield debt to finance their shopping sprees, but the Bank of England’s most aggressive monetary tightening cycle since the 1980s has dramatically scaled up the cost of cash.
As a result, takeover activity has dropped off a cliff, with worldwide M&A activity totalling a measly $1.07 trillion during the first five months of 2023 – down 42 per cent compared to the same period last year, according to data from the London Stock Exchange group.
A lower January to May total has only been recorded once in the last decade, in 2020.
Analysts at Numis now reckon as high base rates become the “new normal”, IPOs may shift back into view as the natural exit route for investors.
“Rising base rates have significantly increased the cost of high yield debt, which is typically used by private equity investors to finance take-privates and to fund expansion of their portfolio companies,” said Alec Pratt, managing director of M&A at Numis, in a note today.
“IPOs may become significantly more attractive as an exit option compared to a secondary sale to new private equity buyers,” he added.
Numis said that publicly listed firms had also financed themselves via equity issuance over the past three years, meaning that their cost of capital has been less exposed to rapid rate hikes.
The two trends “could reverse the de-equitisation we have seen since the start of the ultra-low interest rate environment began in 2009,” Pratt added.
The rosy reading of today’s rate hike comes after a slump in the IPO market in London this year. Cash raised via IPOs plunged 80 per cent in the first quarter of the year, according to data from EY.
Regulators and London Stock Exchange Officials have been on a rampage to try and slash red tape and ease the process of listing in London. The FCA has proposed merging its standard and premium segments in a bid to tempt more firms to come to market.
