Equity capital markets are tentatively open for business with banks testing the waters of subsiding volatility through block trades. As those land successfully, practitioners debate whether Europe’s stalled IPO market is also ready for a post-Easter revival, sources say.
Several IPOs have publicly stated it is their plan to list in the second quarter of this year, including Swiss healthcare company Galderma, the bellwether IPO of 2022, owned by sponsor EQT.
The Pulse has previously reported that the spin-off of ABB’s [SWX: ABBN] mobility unit, the listing of Coca Cola Beverages Africa, the IPO of Eni’s renewable division Plenitude and a listing of Spanish storage company Mecalux have been pitched alongside Galderma as names for Q2 deals, having originally been planned for the pre-Easter window.
This news service has reported that all these transactions are still in motion, waiting for a moment of market calm to restart their listing processes.
While stock market volatility appeared to subside at the end of March, it returned in the first week of April and has continued into the week before Easter.
Europe’s Stoxx 600 is still down almost 8% for the year and the S&P 500 is down by a similar amount.
“We had some decent performance on blocks, but the European IPO market is completely untested, and people are really wrestling with whether Q2 is going to be a viable window, given questions over how solid the backdrop is,” said a banker.
“We had two weeks of good performance and now markets are softer again, it is the most interesting dilemma in ECM, whether IPO sellers will try and brave this market,” he added.
IPO fight
The market is far from united on whether to launch IPOs after Easter. Some sources say there is a cohort of banks and advisors eager to get deals started after having to sit on their hands as Russia invaded Ukraine in February. A lack of activity so far this year could be stoking courage, some added.
European ECM issuance is down 75% in value year-to-date according to Dealogic, with IPOs down 87%. While the EMEA region has seen some activity in the Middle East, including the USD 6bn listing of DEWA [DFM:DEWA] in Dubai and the USD 1.36bn IPO of Nahdi Medical [TADAWUL: 4164], the local issuance boom has mainly benefitted regional players and has done little to compensate deal hungry European ECM bankers.
However, choppy markets, year-to-date portfolio losses and general caution over the long-term direction of the global economy is causing investors to demand greater discounts for the waiting IPO crop as they continue to engage with banks.
Bank of America’s April fund managers’ survey reported that optimism around global growth among respondents was at an all-time low, although equity allocation was still high.
Investors speaking to the ECM Pulse even before Russia’s invasion of Ukraine were unenamoured with the IPO market and wanted heavy concessions from issuers. This price sensitivity has only intensified since the outbreak of war in Ukraine.
“The big debate now is over IPOs and people really want to get going on their deals but there is still a fight going on around valuation,” said a second banker.
He added that there are potentially between three and six IPOs being readied for launch, potentially as soon as the Easter holiday is over. But these remain “live discussions” and no decision has been made yet on whether to go ahead, he cautioned.
“Some banks are being very careful because behind a lot of these IPOs are big private equity companies and they don’t want to advise them to take the wrong window and then damage that relationship for future deals,” a third banker added.
The second banker added: “the problem is we can't go to issuers and offer them a 90%, 95% chance of success, because there hasn't been a four-week period of market calm this year. That may be difficult for an issuer to hear when there are billions of block paper being placed but the difference is these trades are in and out of the market quickly and are small slices of very liquid companies.”
Investors hurting
Another problem for the buyside is that many are sitting on less powder to invest.
According to research from Bank of America and EPFR Global, there has been USD 206bn of inflows into global equities year-to-date with ETFs as the main beneficiary. Long-only funds have experienced USD 32.4bn of outflows.
Although bond allocation remains near an all-time low, according to data released by Bank of America on April 7, the bank has now recorded a sixth straight week of bond inflows against the biggest week of equity outflows since Nov 2021.
It added there have been eight straight weeks of EU equity outflows.
Institutional, long-only, investors are the driving force behind European IPOs. If they are not on board when a wave of deals is launched, books will not meet issuers’ expectations.
While some investors are sitting on gains from successful block trades over the last few weeks, many are still reticent to take the risk associated to IPOs.
“Institutional longs have been present in some of the blocks that we have done, which is great, but it is a whole other game in IPOs particularly if you are seeing redemptions,” said the second banker. “When your back is against the wall you don’t want to take a risk.”
Many long-onlies are also sitting on big positions in 2021 IPOs, which have underperformed. When weighted for size, IPOs priced in 2021 have yielded an 11% loss for investors, according to Dealogic data. Some of last year’s largest deals have been the worst performers.
A fourth banker warned that even if the window should open for some high-quality IPOs, like Galderma, that should not be taken as an invitation for everyone to pile in.
“Issuers will have to be careful as investors will not have the same attention for everyone,” he said. “In a more competitive situation, investors will be able to pick and choose.”
