Long-in-the-tooth investors hate to say “I told you so”—but many saw it coming. The rapacious appetite for IPOs in the opening months of 2021 has left markets with a bout of indigestion. The second quarter of the year has seen more IPOs in the mid-to-low range of their indicative price ranges compared with the first quarter, owing to fears over rising inflation, market turbulence and top-heavy valuations.
In Spain, renewable energy producer Ecoener was forced to trim the size of its offer this month due to lukewarm demand, pricing at the bottom of its range. This was followed by a 15% slide in its first day of trading.
Even Europe's biggest laboratory group, Synlab, was not immune —the company had to scale back its issuance and pricing aspirations in its Frankfurt listing. This speaks volumes given the company's frontline engagement in genetically sequencing SARS-CoV2 amid the pandemic.
Seeing the market catch its breath, online car retailer MeinAuto Group decided this month to shelve its IPO plans altogether, preferring to wait for calmer waters before its float.
Tech’s expectations
Recent weeks have seen a move away from hyped technology stocks into more cyclical, industrial sectors. Reacting to signs of inflation, investors are concerned that the valuations of tech picks, which are priced using speculative discounted cash flow models, won't deliver on their return expectations. There is some concern that rising costs will force policymakers to raise interest rates, which is never good news for equities and especially not for growth stocks.
This tilt away from technology could harm the enthusiasm for SPACs. There was an explosion of blank check company listings in the US this year, as these cash shells primarily targeted private tech assets. The phenomenon has been slowly catching on in European markets, but the recent cooling off could hamper SPAC growth in Europe in the immediate term.
Cooler heads prevail
However, market concerns may be somewhat overbaked. BlackRock has said that, rather than a traditional economic recovery, we are witnessing a zero-to-100 restart with no precedent. This is causing hotter inflation than investors are used to seeing after a decade of absent price growth.
While this is making it difficult for investors to get their bearings, the world's largest asset manager says that near-term macro data aren't nearly enough to prompt a change of course on interest rate policy by the closely watched Federal Reserve. By next quarter, then, markets may look back on this period as a mere bump in the road to recovery.
Ok fine, but what about my planned IPO?
For European issuers with IPO aspirations, there are some simple steps that can be taken.
- Sound out investors early in order to gauge appetite.
- Build anticipation—develop a compelling equity story that makes sense in the context of the pandemic and the ongoing economic restart.
- Investor priorities have shifted away from tech, for the time being, which means you need to answer this question: How will this directly affect you and your equity story?
- Be realistic about your price range. Highballing won't look good if you have to later cut your offer price.
- Just wait, investor appetite will return. With IPOs, patience is a virtue.
