IPOs on the ASX raised more capital in 2021 than the previous seven years and, while things are already cooling off this year, JOSH LEWIS writes that there is still market appetite for the right IPOs despite significant headwinds.

Rising interest rates and global geopolitical tensions are having an impact on the Initial Public Offering (IPO) landscape in Australia following a gangbuster year for IPOs in 2021.

The perfect storm was created last year for IPOs with record low interest rates and a rally in commodity prices.

The Covid-19 pandemic saw governments plunge money into the economy to make sure no one was failing, which resulted in so much stimulus that the markets had no choice but to rally.

This resulted in people being more willing to take on risk, as they knew they stood a good chance of achieving decent returns.

Law firm Herbert Smith Freehills noted in a briefing earlier this year that 2021 was a “bumper year”, with more IPOs coming to market, more capital raised and a greater aggregate market capitalisation than each of the past five years.

However, it added that the increase in capital raised in 2021 was mostly a result of the higher number of IPOs, as opposed to an increase in the average capital raised per IPO.

There was a total of 240 new listings on the ASX in 2021, the bourse’s biggest year since the height of the mining boom and bull market of 2007, and more than double the 113 new listings in 2020.

ASX IPOs raised over $13 billion in capital last year, the highest in seven years, and well up on the mere $5.3 billion of IPO capital raised in 2020.

Bumpy start for 2022

The start of 2022 has seen a noticeable drop in new IPOs, with several headwinds impacting the market, including the war in Ukraine, supply chain issues due to Shanghai’s extended COVID-19 lockdowns and rising interest rates.

May and June are typically not strong months for the ASX because of the end of the financial year, but there is still an air of optimism for the remainder of the year, especially given the returns investors have enjoyed over the past 12 months.

While many will still want to re-invest their returns, they are likely to be more selective in the sectors they choose to back.

The technology sector is expected to find it more difficult raising capital in the current climate, with interest rates and their capital costs climbing, while their returns are expected to be going down.

Some companies seeking capital are looking to alternative funding paths, such as reverse takeovers, private equity raises and larger debt facilities, but only time can tell if these vehicles deliver the goods.

Shining lights among the gloom

One sector showing promise in the current climate is the battery mineral space for successful IPOs in the near-term, with industry insiders expecting lithium, graphite, copper and everything else that goes into a battery to continue to be a focus for investors.

There has been no shortage of media coverage of the anticipated supply crunch of critical minerals as production of electric vehicles continues to ramp up.

The looming shortage has even seen Tesla CEO Elon Musk saying he needs to get into the mining game because of the anticipated shortfall of critical minerals such as lithium later this decade.

The positive outlook for metals critical to the success of the renewables sector also highlights the increasing importance Environmental, Social and Governance (ESG) will play in the success of future IPOs.

There is an increasing impetus from investors to hold companies accountable and to ensure they are abiding by core ESG principles.

This is also leading some financial experts to predict that some funds will make it part of their investment mandate to only invest in companies that are taking their ESG seriously.

Bodies such as the Accounting Standards Board are also likely to implement specific accounting standards to ensure companies have ESG frameworks and policies in place, and are adhering to them.

Industry insiders believe we are only seeing the start of the ramp up of the regulatory environment in relation to ESG.

Those that can get to the forefront of the movement are most likely to capitalise as investors pay closer attention to companies’ environmental credentials and their social licence to operate.