It has been a year of adjustment for equity capital markets’ bankers and investors alike. Without monetary stimulus to boost stocks, equity players have had to relearn how to exist in a world of climbing interest rates and hope for the best in 2023.
The Fed delivered a 50bp rate rise on Wednesday, after a second month of better-than-expected inflation data. According to CME Group’s Fed Watch tool, markets broadly expect a Federal Funds rate of around or just below 500bp by the middle of next year.
To quote Charles Dickens’ Christmas Carol, Fed Chair Jay Powell became a “tight-fisted hand at the grindstone” in 2022. Unlike old Ebeneezer Scrooge, however, Powell is unlikely to suffer a complete personality change and reverse the direction on rates anytime soon, even if he does slow down their hiking pace.
Markets are finally coming to terms with that, raising hopes of greater issuance next year even if in different conditions, bankers speaking to the Pulse say.
The return of sellers to the accelerated market seen in recent weeks will continue into 1Q23, two ECM bankers and one ECM investor said.
There are hopes that the same pragmatism will allow the IPO market to also reopen, although practitioners expect most new listings later in 2023.
“Sellers and sponsors now realise they must sell below 2021 IPO issuance price to do secondaries, and most are much more realistic about IPO valuation as well,” said one of the bankers. “It is going to take time to adjust, and everyone must be dispassionate about the backdrop. Sponsors will keep going, raise funds and recycle.”
“There is only so much they can sell through continuation funds or to each other; there comes a time to gracefully exit these assets and move on,” he continued.
Everything must go
At the end of November, accelerated deals in financial services company Allfunds [AMS:ALLFG] and Italian payments company Nexi [BIT:NEXI] saw issuers selling down at significant discounts.
The sellers in Allfunds sold well below the IPO price. On Nexi, Italian bank Intesa Sanpaolo also exited far below its entry point in the investor register in 2019.
Both sellers were amenable to discounts close to 10% to facilitate the deals, with investors demanding more reward for providing liquidity.
The ECM investor added that he expects this to continue into next year, as rate rises fuel volatile secondary markets.
“In this market investors want to be nimbler,” said the investor. “For a block trade worth 100 days of trading, I think discounts could even go up to the high teens.”
A third ECM banker said he expected Q1 to mirror the more optimistic tones of the last few weeks.
In recent weeks, a few sellers have wall-crossed potential blocks and chosen not to launch, according to one ECM banker and the ECM investor. This was due to a lack of demand from long-only investors so late in the year, pushing deals to Q1 instead.
“There is still a lot of pent-up blocks supply and that tells you people have got their heads around new valuations,” said the first banker.
Focus on fundamentals
Another change in European ECM, which has taken some time for the market to get used to, is the type of companies that can be brought for an IPO in a new rising rate environment.
Both the first banker and investor said that alongside wanting to buy IPOs at lower valuations, buysiders are focused on real cash flows. The days of growth-driven tech companies without profits getting a strong reception in Europe’s IPO market are over, at least for now.
Most agree there is no overriding sector theme for next year, aside from companies involved in the transition to green energy generation, as previously reported by the Pulse.
But across the board, businesses that are cash generative and profitable will be at the forefront of investors’ minds.
“The rate environment changes what we want to buy, and a balance sheet focus is here to stay,” the investor said. “We expect to see more late-stage pre-IPO situations where companies look to fix that balance sheet pre-IPO.”
The investor added he expects more private companies to engage in late-stage funding rounds to clear debt off balance sheets and expand their shareholder register before embarking on an IPO.
In November, Swiss conglomerate ABB [SWX:ABBN] conducted a CHF 200m placement with long-term equity strategy fund of Interogo Holding (IH) and family office moyreal holding ag for its e-mobility unit.
The investors could become cornerstones in the unit’s IPO, as previously reported by this news service.
The Fed is unlikely to be giving too many gifts to the market next year, but if it holds to course with gradual rate rises to around 5% and assuming no macro black swans appear, EMEA ECM should be on course for a happier New Year.
This is the final ECM Pulse of 2022, we wish a very Merry Christmas and a Happy New Year. We will be back in January 2023.
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