Long-term Bet: Europe’s 2017 IPO class beats five-year benchmark as US deals underperform

Data Insight ECM Explorer 21 October

Long-term Bet: Europe’s 2017 IPO class beats five-year benchmark as US deals underperform

European IPOs have substantially outperformed the Stoxx 600 index over a five-year period, with 2017 deals trading 9.5 percentage points higher than the main European equity benchmark, Dealogic data shows. US listings from that year tell a different story, however, underperforming large American indices.

Why the five-year check-in given this year’s prolonged market turmoil, readers may wonder? Last week, the Stoxx 600 dipped into negative territory for the first time over the five-year horizon, a notable milestone given the importance of long-term investment horizons, especially for long-only investors.

While the index has since recovered, the benchmark was still just above par as of close on Wednesday 19 October.

Looking back at the 2017 IPO crop, data shows that those listings have performed better than the Stoxx 600, generating an 11.5% weighted return for investors who bought at those IPOs, according to Dealogic data as of 19 October. The Stoxx 600 has only generated around a 2% return over the last five years.

Some of Europe’s best performers from the class of 2017, on a weighted basis, include Polish retailer Dino Polska [WSE: DNP], Swiss pharmaceutical company Galenica [SWX: GALE] and German e-commerce company Delivery Hero [ETR:DHER], which, despite a 62% fall in its share price year-to-date, is still trading 40% above its IPO price, justifying the IPO discount investors demand on a new stock.

While outperforming European IPOs by around two percentage points, US IPOs from 2017 have underperformed the large US indices, with both the S&P 500 and Nasdaq 100 posting returns of 44% and 82%, respectively, over the five-year period, albeit on the back of a stellar run for big-name tech stocks in 2020 and 2021. These index returns remain robust despite the precipitous drop in markets this year.

Of the large US IPOs, the worst performers have been Altice [NYSE:ATUS] and Snap [NYSE:SNAP], down 81.5% and 36% from their IPO price, respectively. Other big names from the 2017 IPO vintage, however, have boosted the US average, notably Switch [NYSE:SWCH], which sits 100% above its IPO price.

For investors, the average performance of IPOs versus established equity indices over five years is a bonus, in Europe at least. But it will also emphasise the need to reward investors at the time of listing with a large enough discount to offset volatility, to which new stocks are particularly exposed after pricing given the lack of liquidity.

ECM bankers speaking to this news service throughout 2022 have said that unless markets calm down, issuers will not be able to complete IPOs without significantly dropping price expectations.

Even the blockbuster listing of Porsche [ETR:P911] had to come at a concession to sellers’ initial hopes of pricing at a multiple close to Ferrari [NYSE:RACE]. After a timid first day, aftermarket performance has rallied, with shares up 14% as of yesterday’s close (Thursday), and investors are happily sitting on a decent IPO bump.

In contrast to the long-term performance of 2017 deals, 2021 IPOs are down 35% on a weighted basis, according to Dealogic, while Stoxx 600 has fallen by 16% in the last year. Many investors have told this news service in the last 12 months that the 2021 IPO market was overhyped, and deals priced aggressively as investors fell prey to FOMO, or the fear of missing out. The underperformance also shows how illiquid IPOs can suffer when markets turn negative.

IPOs should outperform other equities given the discount supposedly baked into them to reward investors backing a new and untested stock. The performance of the 2017 IPO crop over the last five years supports that assertion and will strengthen investors’ case to hold out for the right price.

Those still keen on going public should take note.

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