IPO Eye. An overview of Q No Main Market listings took place this quarter, down from the one deal that took place in Q

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1 Q IPO Eye An overview of Q British sporting summer dampens market return Ernst & Young s IPO Eye is a quarterly publication for those with a vested interest in Initial Public Offerings (IPOs) on the London Stock Market. The IPO Eye provides data and analysis on new issues for both the Main Market and AIM. We identify market trends and provide insight for the future. If you have any feedback please me at dvaughan@uk.ey.com David Vaughan IPO Leader Ernst & Young LLP To receive hard copies of the IPO Eye, please dcordell@uk.ey.com It was always the expectation that the London market would be slow in Q3 given the holiday period compounded by the Olympics and Paralympics taking place. That is exactly what transpired. No Main Market listings took place this quarter, down from the one deal that took place in Q There have been three Main Market listings so far in 2012 compared to six deals in the same period of There were eight AIM deals this quarter down from the 11 that took place in Q and 15 in Q3 last year. However 214m was raised this quarter representing an increase of 118m and 29m on Q and Q respectively. 338m has been raised on AIM so far this year from 24 deals down from the 427m raised from 30 deals during the Main Market Whilst this quarter s performance was expected, the volume of Main Market IPOs over the past 12 months has been poor. Only four Main Market lpos have of 786m. The market desperately needs a kick-start and the UK government is currently exploring ways of helping UK companies raise capital in this challenging environment. These are discussed later. AIM This quarter saw eight companies come to AIM raising 214m. IPOs originated from Australia, Asia, Africa and Europe further illustrating the geographical pull that London still possesses. Once again natural resources remained the dominant sector with three deals accounting for 60% of total funds raised during the quarter. Global update Globally the Asian markets dominated the quarter accounting for 76% of total IPO funds raised with 102 deals at US$18.3b. The Japan Airlines IPO was the major contributor raising US$8.5b, approximately 35% of the IPOs on the US exchanges raise US$3.5b in 23 deals compared to US$3.9b and in 19 deals in Q Of these 23 deals 70% were PE and VC sponsored. Moving across to Europe we saw US$372m raised this quarter from 23 IPOs comprising of only 2% of global capital raised, clearly demonstrating prevailing in this region.

2 ew issues AIM Q Table 1 Date of admission 05-Jul Jul Jul Aug Aug Aug Sep Sep-12 Company Kada Technology Holdings Ltd Revolymer Plc Wishbone Gold Plc LZYE Group Plc China Chaintek United Co., Ltd Fox Marble Holdings Plc Eland Oil & Gas Plc Clinigen Group Plc PE backed Country of incorporation (LSE) Region of domicile (main area of operations) Sector No Bermuda China Electrical Components & Equipment No UK UK Speciality Chemicals Market cap on admission m Funds raised m Placing price (p) Closing Closing price day of 28/09/12 trading (p) (p) % Change from placing price Lock-in % Directors, Holders of more than 10% 12m % Directors, Senior Managers, certain institutional shareholders 12m No Gibraltar Australia Gold Mining % Directors, Barry Everingham, Carousel Holdings International Ltd 12m No UK China Specialised Consumer Services No Cayman Islands China Transportation Services % Shareholders 12m % Directors 3m after publication of CY12 results and 12m after Admission No UK Kosovo General Mining % Directors, certain shareholders 12m No Scotland Nigeria Exploration & Production % Directors, Proposed Directors 12m No UK UK Drug Retailers % Selling Shareholders 12m, P. George, R. Sibson, A. Jenkins 36m, P. Allen 6m Total Main Market to AIM 01-Aug Jul-12 Namakwa Diamonds Ltd Pinewood Shepperton Plc AIM to Main Market 02-Jul-12 Playtech Ltd No Isle of Man 13-Jul-12 Canaccord Financial Inc PLUS to AIM 30-Jul-12 Good Energy Group Plc No Bermuda Lesotho Diamonds & Gemstones No UK UK Broadcasting & Entertainment No British Columbia 48 0 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Europe Gambling n/a n/a n/a n/a n/a Canada Investment Services No UK UK Alternative Electricity n/a n/a n/a n/a n/a % Directors 6m 2 IPO Eye Q3 2012

3 nalysis Ernst & Young s view Main Market On 14 September the Direct Line Group announced its intention place on 11 October at an estimated valuation of between 2.4b and 2.9b. Direct Line are sure to take encouragement from the 2 October listing of German insurer Talanx AG on the Frankfurt Stock Exchange, which is reportedly the largest listing in Germany since November 2007 raising approximately 415m. We are also aware of a number of other businesses looking to come to the Main Market in Q4, conditions permitting, who are closely watching the outcome of this process. AIM Whilst the Main Market is struggling AIM continues to provide to raise funds. Last quarter saw eight IPOs raising 214m which can be considered a solid result given low market expectations for the period. Of particular note were the listings of Revolymer, Clinigen, and China Chaintek United. The North-England based Revolymer is a pioneer in the manufacture of moisture-retaining gum which is more easily removed from pavements and other surfaces. It raised 25m, the second highest non-resource AIM IPO this year, opening with a market capitalisation of 53m. The largest non-resource AIM IPO of the year also took place this quarter, Midlands-based Clinigen Group plc. The pharmaceutical company specialising in hospital-only medicines, raised 50m and opened with a market capitalisation of 135m. The funds raised will be used to acquire and increase sales of further niche hospitalonly drugs. China has long been touted as a potential source of inbound listings and this quarter s admission of China Chaintek United continued the trend of Chinese companies coming to market in They raised 7.5m with a market capitalisation of 87.5m making it the seventh Chinese listing on the AIM market this year. Encouraging post-trading performances Encouraging signs are being seen from the post-trading performances of three technology companies recently admitted admitted to trading in Q2 this year and is trading exceptionally well at approximately double its initial offering price. Figure 1: Wandisco 1 June 2012 to 28 September 2012 Source: London Stock Exchange Jun Jun Jul Aug Sep In addition, both Zattikka Plc and Incadea Plc have achieved steady growth post listing and are now trading at approximately 12.5% and 20% respectively ahead of their opening price. The market should be encouraged to see that companies with good growth stories can list and raise funds successfully even in these trying economic times. Figure 2: Total number of IPOs vs funds raised Source: London Stock Exchange Funds raised m Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Share price (pence) No of IPOs IPO Eye Q

4 nalysis Ernst & Young s view Pricing The same quarter last year saw a major spike in volatility which is in stark contrast to Q3 this year which saw relative stability in the CBOE index. The index on the whole has been more stable this year in comparison to 2011, which will hopefully encourage companies currently considering their capital raising options. This quarter also saw encouraging movement with the FTSE indices almost 6% above for the quarter. Figure 3: CBOE Volatility S&P 500 Index Market volatility index /01/11 03/02/11 03/03/11 03/04/11 03/05/11 03/06/11 03/07/11 03/08/11 03/09/11 03/10/11 03/11/11 03/12/11 03/01/12 03/02/12 03/03/12 03/04/12 03/05/12 03/06/12 03/07/12 03/08/12 03/09/12 Figure 4: FTSE indices Q Source: Capital IQ /07/12 09/07/12 16/07/12 23/07/12 30/07/12 06/08/12 13/08/12 20/08/12 27/08/12 03/09/12 10/09/12 17/09/12 24/09/12 FTSE 100 FTSE all share FTSE 250 FTSE AIM 100 Potential rule change on tech IPOs On Thursday 20 September the government announced plans to make it easier for high-growth companies to launch IPOs in London. The move is being considered to enhance London s status as a listing destination for technology companies and thus stemming the current tide of UK tech companies departing our shores in preference for, generally, a listing in the US. The proposal forms part of a wider consultation that UK authorities are currently undertaking, sharing parallels with the recent JOBS Act that was implemented in the US. The potential changes put forward by the government include this potential new policy will be released by the government before the end of The initial reaction from the market to these proposals has been positive with most agreeing that any steps to encourage high-growth companies to list in London are to be welcomed. However, many question whether simply opening up a new route to market will be anything near enough to combat the perceived view that London just doesn t get technology companies. The doubters put forward many arguments; that London simply doesn t have the infrastructure tech savy analysts and investors to make it attractive. Some argue that what is really needed is much more grass roots support for high growth companies including investment in Universities, eased regulation, and encouraging better early stage funding for tech entrepreneurs. 4 IPO Eye Q3 2012

5 Looking ahead Proposed changes to Listing Rules Consultation Paper 12/25 On 2 October the FSA issued a series of rule changes affecting the operation of the listing regime and issued a consultation paper on further proposed amendments to to reverse takeovers and seeks to prevent the scenario where issuers, by undertaking a reverse takeover, are able to secure the listing of a business, which would otherwise be ineligible. The two areas which the FSA is looking for The FSA has proposed: Detailing the circumstances where they might consider modifying the Removing the requirement for a minimum absolute percentage free is maintained. Corporate governance The FSA has proposed the following in respect of the eligibility requirements for a premium listing: Introducing the concept of a controlling shareholder. Requiring an agreement is put in place to regulate the relationship between such a shareholder and the listed company. Insisting on a majority of independent directors on the board where a controlling shareholder exists. Prohibiting certain voting arrangements which lower investor protection. Ensuring that these eligibility requirements are complied with on an ongoing basis. what they thought of the current market conditions and to no great surprise the unanimous assessment was that the market is still very tough. Some respondents did point out that the right companies can still come to market successfully provided they have a really robust growth story and a strong management team in place. We asked advisors how many companies they were aware of that planned to IPO over the next 18 months in London. Some 44% knew of between 6-10 companies. Whether this response is encouraging of quality businesses waiting for the window to open that would be great. If though all the respondents are aware of the same 6-10 How many companies are you aware of that plan to IPO in London over the next 18 months? % 3.7% 11.1% 40.7% 44.4% 0% 10% 20% 30% 40% 50% David Vaughan Partner dvaughan@uk.ey.com David is Ernst & Young s IPO Leader and has over 20 years experience as a partner working on a plethora of IPOs, including PE exits. He has led our teams on a number of buy side, sell side and valuation assignments for many of our major clients. David is responsible for leading Ernst & Young s UK IPO team on listing businesses from all sectors, both overseas and domestic companies, onto the UK markets. His personal sector experience includes oil & gas, consumer products, hospitality & leisure, and transportation. David is a member of the Primary Markets Group of the LSE. This group is the main focus for issuers and other market participants to provide input and advice on all matters affecting the LSE s listed and regulated markets. IPO Eye Q

6 urvey results Survey results On 3 September we sent out our annual survey to the IPO Eye readership to gauge your thoughts on various aspects of the IPO market. Thank-you to all those who responded and we re now pleased to share the results with you below. Observations It s of no surprise that market appetite is clearly seen by both companies and advisors as the greatest challenge to achieving a successful IPO and this is consistent with last year s survey. Of note was that respondents appeared to take a softened stance on the issue of stock market volatility. In the 2011 survey, 46% of advisors rated stock market volatility as the greatest challenge challenge in 2011 to third in the 2012 survey. Could it be that the market considers the capital raising environment to have stabilised in London somewhat over the past 12 months? It s interesting to note that advisors ranked China and Russia equally as being the most likely regions to fuel London IPO activity over the next 18 months. Given Russia s prominence over the past 10 years, and emerging Chinese listings in 2012, it will be interesting to see whether this market perception materialises over the next 18 months. Last year we asked readers to predict when they thought the markets would re-open for IPOs. The majority predicted that 2H 2012 would be the period of recovery. Clearly that is not going to happen or else we will all be very busy indeed, but perhaps a successful Direct Line Group IPO followed by one or two more might just be the start of something. Perhaps indicating that you can t keep an optimist down, our readers are now predicting a market awakening in the 2H of 2013, in effect saying the same thing as in 2011, that we are still a year away from recovery. Corporate executives What do you currently see as the greatest challenge in achieving an IPO? Other Listing requirements Business performance Market appetite Stock market volatility Achieving valuation expectations 2.8% 2.8% 5.6% 19.4% 16.7% 22.2% 33.3% 0% 5% 10% 15% 20% 25% 30% 35% When do you expect the London Equity Capital Market to re-open for IPOs? Post 1H % 1H H H H % 16.7% 22.2% 0% 5% 10% 15% 20% 25% 30% 35% 40% 38.9% 6 IPO Eye Q3 2012

7 Advisors What do you currently see as the greatest challenge in achieving an IPO? Please rank the following international segments in relation to the amount of London IPO activity that we expect to see originating from these regions over the next 18 months: Russia/CIS Middle East India China Africa Market appetite Stock market volatility Achieving valuation expectations Listing requirements Average ranking Other 0.0% Business performance 0.0% 7.4% 14.8% 22.2% When do you expect the London Equity Capital Market to re-open for IPOs? 55.6% 0% 10% 20% 30% 40% 50% 60% 6-36 months? May 2013 Look no further than the Ernst & Young IPO Retreat an exclusive invitation-only event for a select group of CEOs and CFOs contemplating an IPO on one of the London markets. Not only will it give you unparalleled advice from key advisors and guest speakers who have been through the process, but it will also provide invaluable networking opportunities. An IPO is not for everyone but the IPO Retreat offers an growth option for your business. dcordell@uk.ey.com Eye on AIM Ernst & Young produces two indices which monitor the performance of AIM companies in the mining and oil & gas sectors on a weekly basis. Movements and analysis of the indices are reported in quarterly publications. Ernst & Young Global IPO Center of Excellence Our Global IPO Center of Excellence is a virtual hub which provides access to tools and knowledge for every step of means to considering capital raising options and addressing post-ipo risks. It provides access to all our IPO knowledge, tools, thought leadership and contacts from around the world in one easy-to-use source. Post 1H H H H % 11.1% 33.3% 33.3% advisor to clients on their IPOs. Our experienced team of equity capital markets specialists focuses on providing independent advice on all aspects of IPOs and is therefore well placed to act as lead advisor and sponsor to companies seeking to list, as well as on subsequent transactions requiring a sponsor. 2H % 0% 5% 10% 15% 20% 25% 30% 35% IPO Eye Q

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