Martin Flanagan: 2013 may be year of the float but don’t bet on it

Capital raised through initial public offerings (IPOs) of private equity-backed companies in the 11 months to November 2012 nearly halved to $20.5 billion (£12.7bn) from $38.6bn. The number of such flotations dropped to 103 from 116, according to data compiled by Ernst & Young.

And, unfortunately for the Mayfair brass plate boys, virtually all the negative factors that hobbled investor appetite for new floats last year remain part of the background fabric for market sentiment in the coming 12 months.

America’s recovery is tentative, with the looming stateside “fiscal cliff” of higher taxes and reduced public spending unresolved as we went to press. The eurozone financial crisis is far from over, Britain is mired in a chronic austerity climate. The performance of emerging economies is patchy.

Geo-political jitters, from a possible Israeli attack on Iranian nuclear facilities to Chinese aggressiveness on territorial rights in the South China Sea, are tangible.

And, particularly in the US, the reputation of flotations generally was hurt by the major embarrassment surrounding the giant Facebook IPO last year.

Amid such uncertainty, you wonder if investors would be clamouring for a slice of new offerings, particularly allied to concerns that private equity company backers may be wanting to bail out of companies because the best is behind.

Would-be investors could therefore cite both macro-economic concerns and suspicion about the private equity sector for sitting on their hands.

Admittedly, other factors can help buck the trend as private equity seeks to cash in its chips in businesses. One is the law of special cases, typically when an IPO prospect has an impressive earnings records and good visibility on revenues. Niche  industry positions, where the barriers to entry for competitors are high, will also always help give new offerings a tailwind. And you can never discount momentum generated by a counter-intuitive view of stock investment.

Rothschild said you should invest when there is blood in the streets. A more recent financial guru, the late Jimmy Goldsmith, claimed that when you heard the sector bandwagon, it was too late.

Such advice from former financial sages would suggest that 2013 would be exactly when investors should back new offerings, even the private equity-coloured ones.

And yet … even allowing for these slivers of optimism, I expect any recovery in capital raised by companies this year to be incremental at best. Most investors jump into calm waters, not choppy ones.

Banking stocks are not for the faint-hearted

And on contrarian investor thinking – see above – banks and other financial companies added $430 billion to Wall Street last year. British banking stocks also ended 2012 much nearer year-highs than lows.

All achieved amid industry scandals, regulatory crackdowns and continuing taxpayer-backed ballast for the sector. However, banking as the stock market dark horse for 2013 is still not one for the risk-averse, I reckon.