Shareholders are mulling reducing positions in the companies they took public in 2021, despite sitting on heavy losses as stocks trade well under IPO prices, sources tell the Pulse.
The accelerated market in Europe has been subdued for several weeks, with block trades held back by sale restrictions before Q1 earnings releases and in anticipation of the meeting of the US Federal Reserve on May 4.
Companies have come out of blackouts and the Fed meeting is over, but heightened market volatility since then has made all ECM activity difficult.
“We just need markets to calm a bit,” said an ECM banker. “Now corporate results are out of the way we expect things to pick up.” Some of these blocks are expected to be in 2021 IPO names despite many of these deals trading underwater.
Several sell-side sources confirmed to the ECM Pulse that many 2021 IPO sellers have accepted the fact that their remaining stock is unlikely to return to IPO levels. But many, particularly financial sponsors, are still keen to monetise holdings.
A second ECM banker said selling has become more attractive for many financial sponsors to build a war chest for capital deployment, particularly given difficulties in the high-yield market and in raising leverage for new deals.
Also, many sponsors are, despite poor trading since IPO, sitting on positive returns on early-stage investments.
“Some issuers are still heavily in the green on the investment they made pre-IPO and there are debates going on about what to do,” said a third ECM banker. “They want to know what is the perception of doing a block when the stock is down 20% or 30% for the year and is materially below IPO price.”
“Some of those issuers are coming to us and asking what we think they can sell, now that we are out of results season, but it is still a very difficult market to navigate,” he added.
For many sellers, the thinking is that if they don’t sell soon, they may miss an opportunity, sources argue.
Several shareholders are also regretting not reducing their positions earlier this year, said the second banker, before global macroeconomic conditions worsened and geopolitical tension spiked because of the Russian invasion of Ukraine.
Their holdings have, in some cases, fallen by double digit margins since and there is now an understandable urge from sponsors to deal where they can in case market conditions go further south.
But picking a window when markets remain violent is difficult, particularly in stocks where there is a growth or tech-angle, as it was the case for many of 2021 IPOs. Large disruptive tech firms have been among the largest underperformers among listed equities in 2022.
“Everyone needs to be mindful of sentiment, particularly advisors and the issuers,” said the third banker adding that he had thought deals had been ready to go after meeting of the last Fed meeting two weeks ago before markets violently fell again.
Global market performance since the Fed meeting has been poor, with US indices leading the downward trend. The CBOE Vix index has hovered around 30 for the last fortnight which, while not making block trades impossible, makes investors nervous.
The other side of the trade
Sponsors may be warming to the possibility of selling down their underwater holdings, but for deals to work they need investors to be willing to buy more of a stock on which they may have taken a heavy loss.
When weighted for size, the whole 2021 EMEA IPO market has produced a negative weighted return of over 20%, according to Dealogic data, with some of the largest and most well subscribed deals as the worst performers.
Despite this, an investor speaking to the ECM Pulse said that his firm would still be willing to look at trades in last year’s IPOs. Any stock banks bring to market would have to fit into the broader macroeconomic themes being played out in equities, he cautioned.
“We are being very selective about the names we are buying. It isn’t a ‘buy the dip’ moment, it is a structural change in markets,” he added.
Many investment outfits are lucky enough to be able to take a longer-term view on stocks and, therefore, can make selective investments in companies that are deemed to still be likely long-term disruptive leaders despite big-tech’s current woes, the investor said.
But the mindset of most investors is changing away from growth to defensive plays that can withstand the economic pressures being predicted by global central banks, he cautioned.
“We are back to a bunker portfolio,” he added.
Even if investors are willing to take a bet on last year’s IPO candidates, many will demand large discounts to take part. The average EMEA block discount since the Russian invasion of Ukraine on February 24th has been 7.35%, according to Dealogic data.
Despite this hefty average concession, many of this year’s blocks are also underwater vs. issue price. Investors are more likely to demand an even greater discount to the average so far this year, especially in a name that has underperformed since listing.
For many sellers already sitting on losses, that price may be too high.
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