In the battle for the hearts and minds of investors, IPOs – the prestige product for ECM professionals – are being rebuffed by the buyside who are seeking to put huge levels of cash to work in blocks.
Market practitioners have repeatedly spoken to the ECM Pulse of the vast cash reserves held by investors.
According to data published on Friday, February 23, from Bank of America and EPFR, USD 354bn of global asset allocation has flowed to cash since February 2022, compared with only USD 40bn to equities. There has been USD 12bn withdrawn from gold and USD 135bn from bonds.
Cash is once again king among global investors.
This optimism prompted some equity capital markets advisors to start pushing their IPO candidates towards early issuance in 2023 with web hosting firm IONOS [ETR:IOS] and Italian electric components maker EuroGroup Laminations [BIT:EGLA] both listing in the first quarter.
The result of both deals was underwhelming, with both pricing well below their initial valuation targets and subsequently trading down.
Two investors speaking to this news service said there was little value in the IPO market at the valuations that issuers want and their focus was now firmly on block trades.
“Blocks are working for investors at the moment, IPOs are not”, one said, adding that trading in both IONOS and EuroGroup showed that there was still a “mistrust” of new listings among European equity investors.
Block trades in EMEA so far this year have provided a weighted return of around 5% for investors, according to Dealogic data, which compares well against the losses experienced so far by investors in IONOS and EuroGroup.
Many investors have told this column throughout 2023 that they are still stuck with loss-making stakes from IPOs bought in 2021.
Like many sponsor sellers, investors cannot shift the amount of paper they have been allocated in orphaned IPOs without substantially damaging the share price even more, given the low liquidity of stocks when they are first floated.
Even if a block goes sour, they can exit the position quickly, given the greater volume of trading that takes place in a more established stock.
Mega blocks provide IPO alternative
Traditionally, large ECM-focused investors would not be able to get the size of allocation they need to have a meaningful impact on their portfolio in the blocks market, so they are drawn to IPOs as it provides an opportunity to acquire larger chunks of shares.
However, the return of mega-blocks, as previously highlighted by ECM Pulse, is giving the world’s largest investors a chance to pick up meaningful allocations in the accelerated market.
Last week, Mexican conglomerate FEMSA sold a EUR 3.2bn-equivalent block trade in Dutch brewer Heineken [AMS:HEIA] in a dual tranche share sale in the company and in Heineken Holding NV [AMS:HEIO].
The size of the deal, even though a significant portion was bought back by Heineken, gave some of the world’s largest investors a chance at a sizeable allocation.
Bill Gates reportedly acquired a 3.76% stake in Heineken Holding through the deal alongside strong participation from sovereign wealth funds, as reported last week by this news service.
For an investor like Gates to buy such a stake in a European company in a single trade, worth EUR 876m according to the report, would normally require participation in an IPO, but several upcoming mega blocks might provide multiple opportunities for investors to get similarly jumbo slices overnight.
An ECM banker said that following on from Heineken he had “line of sight on several billion-dollar plus transactions” and that there was sovereign wealth interest in taking anchor stakes in each deal, possibly up to a third in some cases.
In its column on mega-blocks, the ECM Pulse highlighted anticipated selldowns in Haleon [LON:HLN], EQT [STO:EQT], Deutsche Telekom [ETR:DTE}, LSEG [LON:LSEG] and NatWest [LON:NWG] alongside the Heineken trade by FEMSA.
A second banker said he had rarely seen a time where investors were sitting on so much cash but had little inkling into market direction which was why they were favouring blocks over IPOs.
“There has been a huge amount of cash allocated to blocks; in this market investors just want liquidity and the IPOs being talked about mostly aren’t big enough to provide that,” he said. He was hopeful that should markets hold, the IPO market would improve in 2023, but until then many issuers were “stuck.”
A third banker added that his firm was almost entirely concentrated on block trades as the main driver of ECM issuance in the weeks ahead, although all sources speaking to this piece also saw some opportunities in the convertible bond market, as highlighted by sister column ECM Explorer.
While IPOs remain in the cold, block trades are warming up.
