The pursuit of perfection, while admirable, is oftentimes a task doomed to fail. Market signals point to a positive backdrop for ECM deals in September, but many IPO issuers will decide to wait for a better window.
A valuation disconnect between sellers and buyers in Europe’s IPO market has kept most of the new issuance pipeline blocked for the last two years. There have, of course, been severe macroeconomic and geopolitical pressures which have contributed to poor IPO conditions, particularly the war in Ukraine alongside inflation and rising interest rates.
Those pressures are abating. Even though the war in Ukraine rages on, European and US inflation appears to be cooling and equity markets are close to all-time highs again.
One ECM banker told the Pulse he has been conducting early-look IPO meetings for a possible September deal, with feedback from investors the best he had seen in the last two years.
“Markets do feel different,” said Andrew Briscoe, head of EMEA ECM syndicate at Bank of America. “The equity market reaction of late is suggestive of the fact that the soft-landing narrative is mainstream.”
“There have been many perceived headwinds or things to watch out for. But it has largely come down to one thing – inflation. As inflation has subsided, animal spirits have returned,” he added.
Several investors are engaging in cornerstone conversations with issuers, another banker said, adding that that was unexpected before pilot-fishing rounds.
Like last year, Germany is set to be one of Europe’s strongest IPO markets in the second half. In 2022, the blockbuster EUR 9bn IPO of Porsche [ETR:P911] in Frankfurt sweetened a dismal year.
This news service has previously reported that the listings of Schott Pharma, DKV Mobility, and defence contractor Renk are all being plotted for the Autumn IPO window.
Other possible IPO candidates include German bus operator Flix and Portuguese hospital group Luz Saude, although both could be pushed until next year.
The long-awaited IPO of UK software company Arm is the closest to Porsche’s headline grabbing potential, but that will be a US listing. Despite a lack of European leviathans, better investor sentiment points to an opportunity to get deals across the line if issuers are willing to be pragmatic on price.
Missing the boat
According to Briscoe, there are a “handful of decent quality IPOs” slated for September, and beyond, but it should not be framed a full reopening of the IPO market.
“Issuers who think they have a great asset want to wait and not go in this market,” said a fourth banker, citing the frequently delayed listing of EQT [STO-EQT]-owned Swiss skincare company Galderma as an example of a high-quality issuer still sitting on the sidelines.
Yet, “great companies can achieve a great outcome in poor markets,” he noted, citing the Porsche listing last year.
The same has been true this quarter, with the IPOs of hydrogen player Thyssenkrupp Nucera [ETR:NCHs] and Romania’s Hidroelectrica [BUC:H2O].
Despite being less high profile than Porsche, both were highly differentiated offerings which presented a rare opportunity to buy something unavailable elsewhere.
The third banker said IPOs without that novelty factor must be even cheaper and, in these cases, issuers are just not willing to stomach the discounts.
While not entirely risk-averse, as seen in recent block trades, investors want greater IPO discounts to compensate for previous poor performance in Europe. The last bull market in 2021 is still fresh on investors’ minds – and portfolios.
“We are still struggling from the fallout post-2021,” said the fourth banker.
Investors have repeatedly told ECM Pulse that they want discounts of 30% to peers, or fair value, to take the risk of IPOs, given recent losses where issuers pushed too much on price.
Recent valuations on the more successful IPOs, Nucera in particular, were compelling and even Porsche came at a significant discount to its most obvious peer, Italian supercar Ferrari [NASDAQ/BIT:RACE].
Should issuers be willing to take some pain on a small stake sale, results can be rewarding, with a decent uptick in the aftermarket.
Time will tell whether those choosing to wait are proved right.
