Rumblings of life within Europe’s dormant IPO market have had a green tint. Among the few transactions launched over the past fortnight, green energy company Lhyfe stood out against other bellwether hopefuls.

But experience on the recent IPO of the French hydrogen firm shows that pricing a deal remains an extremely difficult task even if in a hot sector, sources say.

Lhyfe was exposed to extreme market volatility during bookbuilding between May 9 and pricing on May 20, which led to a dramatic drop in hedge fund demand, sources told this news service. Hedge fund investors accounted for only 20% of the demand for the deal and were allocated 10% of the stock, according to a source.

The macro backdrop explained the investor hesitancy. Global equity markets have sunken in the past month, with the Nasdaq composite and S&P 500 down around 10% and 5.6% for the month, respectively. The Stoxx 600 has fallen by 2.85% in the same period.

Cornerstone blueprint

 Amid difficulties in bookbuilding, the EUR 110m IPO was carried across the line by several pre-announced cornerstone investors that took 80% of the book.

“I think in a world where all IPOs are incredibly hard, listing a green energy company is the least hard thing to do,” a banker close to Lhyfe told the ECM Pulse. “But the deal depended on the cornerstones,” he conceded.

“You don’t want to launch without them at the moment, even for a green asset, but to get them you have to offer a compelling valuation and vendors have to be willing to take that,” he added.

A banker away from the deal seconded the market’s view that the deal had been hard to pull together, but proved that green IPOs were possible.

Green stocks have held up well in 2022 when compared with other sectors and investors have bagged moderate gains from last year’s renewable energy IPOs, in stark contrast to the rest of the market.

“Most companies can’t survive four weeks of volatility but the notable exception to this is renewable energy and energy transition stocks, especially with the new European impetus to wean itself off energy from complicated political actors like Russia,” the banker said. “It is a complete switch from last year when you couldn’t price a renewable energy transaction because investors thought they were overbought.”

“There is still a price component, though, people won’t just buy at any price and investors have to be willing to wait for a return for many of these companies.”

An investor on the Lhyfe deal said that the final book seemed full of dedicated buyers who wanted to be in the transaction. The book had a lot of “proper incremental demand,” as opposed to last-minute investor buy-in due to fear of missing out.

Sources close to the deal said they had to do ‘thorough education’ on the IPO and, like the banker off the transaction suggested, had to convince investors of the longer-term nature of returns. The process included around 200 investors and five site visits, according to another source close to the deal.

The investor on the deal confirmed this scenario, adding investors had been asked to buy the stock based on revenue multiples for 2025/2026.

Renewable energy IPO hopefuls like Italy’s De Nora and ABB-s e-mobility unit would also have to use forward earnings to convince investors, he added, but both benefit from the same investment thematic that carried Lhyfe across the finish line.

Other sources speaking to the ECM Pulse cited Plenitude, the renewables and retail division of Italy’s Eni [BIT:ENI], as another IPO that could buck volatility and complete a listing.

To wait or not to wait

 Not all companies will be as brave as Lhyfe, though.

In Spain, local press reported that Opdenergy has delayed any potential listing until after summer and other issuers are likely to follow suit.

“You can do a deal at a far lower valuation than you originally thought you might get, or you hold on to the second half where you think you can get a better window. Most people are taking that option, which is a very risky decision,” said the banker close to Lhyfe.

Renewable energy firms that delay until September could join a packed pipeline of transactions that have already postponed until the autumn, including the highly anticipated listings of Galderma and Coca-Cola Africa.

Two further investors questioned the strategy, as worsening global economic data and two further rate rises from the US Federal Reserve are hardly encouraging for September IPO prospects. “If you say you are delaying now, I think you are really looking at a 2023 deal,” said one buysider.

Even if the market improves, a September IPO is still likely to be risky, said the banker close to Lhyfe. “If they all come at once, you may lose any potential valuation benefits anyway.”

Lhyfe opened today at around EUR 8.46 a share, 3.3% below its IPO price. Lhyfe did not respond to requests for comment by the time of publication.