Party over: ECM shift to bear market posture with tech in the firing line

Data InsightECM Pulse 12 May

Party over: ECM shift to bear market posture with tech in the firing line

The equity market slump since last week’s interest rate hike has led investors to accept stocks are now firmly in bear territory. ECM practitioners are switching gears as they prepare for capital raises, particularly for cash-strapped tech stocks, sources tell the Pulse.

Analysts at Bank of America predict the bear run could end around October, as bear markets tend to resolve more quickly than bull ones. But as the adage goes, past performance does not guarantee future results.

With the CBOE Vix index now past 30 again, far above the comfort zone for IPOs, the outlook for IPOs is extremely challenged. Given the wider macroeconomic environment, investors are demanding far greater discounts from sellers.

“There is a cloud hanging over all our portfolio companies and it will continue to grow over companies that are not in the portfolio as well,” said a buysider.

Seasoned practitioners speaking to the ECM Pulse are pointing to the last prolonged bear market for ECM, the Global Financial Crisis. At the time, European deal activity shifted with IPO volume dropping as investors stepped away from riskier investments to concentrate on existing portfolios.

Back in 2009, a drop in EMEA IPO activity was compensated by other deal types, particularly rights issue as companies scrambled to shore up balance sheets, Dealogic data shows.

Because of a surge in equity raising during the COVID-19 pandemic, many companies are well capitalised. But this is not the case for many tech stocks, only recently among investors' favourites.

Recent results have shown signs of balance sheet weakness for some high-growth tech names. On May 10, US-listed Peloton [NASDAQ:PTON] crashed after the company released disappointing Q1 results, with the company’s CEO Barry McCarthy admitting the firm was “thinly capitalised”.

A banker speaking to the ECM Pulse predicted that other high growth tech names are likely to be short of cash and will have to raise capital to fund the growth upon which their business is predicated, or just to continue to survive.

“For those that are already financed, they will be able to continue to deliver as many of these businesses are good companies and meeting expectations,” he said. “But some will need to finance and the debt markets look closed for many. They will be loath to dilute themselves at these prices, but rescue financing is going to happen, although nobody will want to unless they really must.”

According to Dealogic's likely-to-issue data, a predictive algorithm that assesses the likelihood of ECM activity in a given company, there are several large European tech names that are possible issuers of primary equity capital in the next few months (see table).

The short-term outlook for tech names is negative, but BofA analysts predict at least a two-year bear market for what the bank calls “speculative tech”. Shareholders who remain long-term believers in tech names, though, will likely step in to help them through bad times.

“Lots of investors will reluctantly support this type of company in a raise as otherwise they might as well just write off the investment at zero,” the banker added.

A second ECM banker agreed the outlook for tech and growth stocks was grim for both listed and non-listed companies hoping to go public.

“There is no demand for growth,” he said. “There is a huge pipeline of names that simply cannot come to market unless something drastically changes.”

Defensive blocks

Several sources said that despite reticence in the IPO market, they expect block trades to return on days where markets are positive.

Both cited banks and energy as sectors where investors are continuing to show demand through reverse enquiries. And recent trades have shown that very large blocks in the right name can be hugely successful.

On April 28, Finnish investor Sampo [HEL:SAMPO] sold a EUR 1.8bn block in Nordea [HEL:NDA-FI], its entire remaining stake in the bank. The trade doubled in size during bookbuilding as investors clamoured for Sampo to end the equity overhang, this news service reported at the time, showing market capacity to absorb huge amounts of paper in sectors they favour.

While the trade happened before the Fed meeting and the ensuing sell-off, it is still seen as a sign of ongoing demand. Deals will continue to happen, a third banker suggested, even if less sector specific and determined more by the idiosyncratic qualities of individual companies.

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