The cancellation of Renk’s IPO by its sponsor Triton despite putting out a final pricing message has clouded over what had seemed like brighter days for European listings. The fate of the German defence contractor is just a symptom of a wider problem driven by the narrative on rates.

Triton had enough demand to cover Renk’s IPO but that the team working on the deal and the sponsor were nervous about going ahead with a book that was not as strong as it could be, said two sources close to the deal.

“We were unlucky in the last 48 hours on the market,” said one. “We had a good book but just needed it to get a bit stronger; the market deterioration meant some of the last-minute incremental orders we were counting on didn’t materialise.”

Renk’s fortunes were badly affected by its peers’ trading, particularly German defence stocks Rheinmetall [ETR:RHM] and Hensoldt [ETR:HAG], both fallen by double digits from the end of September to last week.

In a cruel twist of fate, both were trading up significantly on Monday, October 9, following the outbreak of war in Israel over the weekend.

Triton and Renk declined to comment.

Fed forces issuer rethink

Sources close to the Renk deal could not provide a specific rationale for why both peers had traded so badly, beyond an outside reaction to general equity market trends.

German’s benchmark DAX index was down by around 5% over the same period, in line with other global benchmarks.

The pair of defence firms were two of the largest beneficiaries of equity investment in Germany since the outbreak of war in the Ukraine, so got hit harder by a sell-off.

Those working on Renk’s IPO blamed the retreat in sentiment on broader macroeconomic flows.

“We are still trying to recover from the Fed meeting at the end of last month,” said the other source close, adding the meeting had struck a far more hawkish tone on rates than many investors had planned for.

“It means we must adjust to rates being higher for longer, which increases the risk of a hard landing for the economy,” he added.

According to the CME’s FedWatch Tool, a majority of Fed Fund Futures traders do not expect a rate cut until at least next June; earlier in the year, many had expected rates to be cut this year or at least early in 2024.

Higher for longer affects IPO appetite as it clouds both company’s financial assumptions for next year, and general equity market sentiment.

In a lower rate environment, IPOs were executed despite huge macroeconomic pressure, including the shutting down of western economies through the COVID-19 pandemic.

Without the “Fed put”, as it has so often been termed by equity investors, buysiders have less confidence in high-risk equity stories, particularly IPOs.

Investors have mostly adapted to higher rates, telling ECM Pulse throughout the year that they are shifting positions into the most liquid situations possible, to offset the damage of equity market fluctuations, which are more frequent in a higher rate environment.

They will buy IPOs, if deals offer exposure that they cannot get in the listed market, as this column wrote last week, highlighting a planned listing for sponsor CVC Advisors as the next ‘must-have’ IPO of 2023.

But if an IPO offers little difference from what investors can already buy, sizeable discounts aren’t attractive enough, as one investor said on Renk.

“IPO issuers have got to adjust to this rate environment and unfortunately IPO vendor adjustment speed is slower than others,” said the second source, referring to deals he is working on for 2024. “We’ve only just managed to get them to accept things are not like they were in 2021, but now they have to adjust again to higher for longer.”

Not closed for business

Investment based off equity liquidity has led to huge appetite for accelerated transactions versus diminished appetite for IPOs.

One investor said their firm continues to place reverse enquiries on situations where portfolio managers are keen to get exposure to high quality-listed names. “If we can unlock block trades then that is great business for us,” the investor said.

Despite a more intransient Fed, secondary blocks and accelerated primary capital raising offer investors a chance to bank real returns quickly, to capture index-beating performance or have comfort in liquid positions.

Last week, two large secondary trades in Haleon [LSE:HLN] and Polish retailer Allegro [WSE:ALE] attracted strong demand.

Both were also roughly in-line with previous pricing, according to Dealogic’s Price of Liquidity ratio, which measures discounts on blocks versus the size of the stake sold.

“The market is facing a dichotomy,” said an ECM banker, pointing to Renk being postponed during the same 24 hours of the Haleon and Allegro blocks. “The reason is you can manage risk on blocks and hedge.

“People still need performance; rates are at high levels, but benchmarks are still broadly up for the year and blocks are the performance generator at the moment.”

Most are still clinging to hopes for better months ahead, but Fed policy could mean more of the same in 2024 and a later IPO window than many had planned for.