The troubles and travails of Europe’s IPO market have been the most prominent headline for the continent’s equity capital markets, but they hide the extraordinary investor demand for large accelerated transactions.
A cursory look at the IPO market this year would suggest that market dynamics are the same as in 2022, but a significant number of large USD 1bn+ block trades and an occasional rights issue already priced in 2023 paint a different picture.
There have been 10 accelerated transactions over USD 1bn in Europe so far this year, across both primary raises and secondary sell-downs, for USD 17.4bn of volume, only slightly below the USD 17.6bn of USD 1bn+ ABBs priced in 2021 across 12 transactions, perhaps the most risk-on year in the history of European equity capital markets.
The trend of big deals continued last week, with a GBP 2.7bn block in London Stock Exchange Group [LON:LSEG], the second sell-down in the name this year and the largest European ECM deal of 2023 so far. The transaction priced tight with a ratio of - 0.76x according to Dealogic’s Price of Liquidity ratio and attracted enough demand for an upsize.
Not only did the transaction price well, but it also immediately traded up.
“These deals on the larger end of the spectrum have worked really well here, and it isn’t a guarantee if you look at some big US and Asian deals this year,” said an ECM banker.
The LSEG deal was largely filled with long-only investors and fundamental holders of the stock. It is a fascinating dynamic given long-onlies often eschew the accelerated market but have shown major support for Europe’s 2023 mega blocks class.
Splash the cash
Alongside big secondary sales like LSEG, and a sell-down in Haleon [LON:HLN] by GSK [LON:GSK] last week, buyers have also been able to reap outsized rewards from various primary transactions so far this year, particularly in renewable energy and green infrastructure, an asset class which will continue to command attention, as reported.
The alpha on primary and secondary mega deals is the force driving investors given both have largely performed in line with, or above their benchmarks.
Performance means there is a clamour for more mega blocks and as reported last week, alongside flagging the LSEG trade, there is hope Mexican conglomerate FEMSA might continue to sell down its holdings in Heineken [AMS:HEIA] and Heineken Holding [AMS:HEIO] since the lock-up expiry.
As markets improve, buysiders have to take risk to stay in line with their benchmarks. “You can’t sit on cash anymore, there is an active need to deploy it,” the ECM banker added. “It doesn’t have to be ECM but if we can bring deals in big corporates that are safe and liquid it plays to the need for investors to deploy and make money.”
Research data from Bank of America reported that global flows to cash of USD 151bn over the past four weeks have slowed when compared with the USD 404bn in the four weeks after SVB’s collapse.
Both the CBOE Vix volatility index and Europe’s VSTOXX also sit at benign levels from a historical perspective.
Long-only investors talking to the ECM Pulse throughout the year confirm they have piles of cash to put to work and prefer blocks to IPOs given the liquidity of the underlying asset, especially in large blue-chip names.
While many long-onlies, who have far more boxes to tick than hedge funds when making an investment, often can’t find significant enough ticket sizes in standard European blocks, the mega-deals are both high-profile and large enough to make an order worthwhile.
Are larger IPOs the answer?
In comparison to the blocks scene, there are few IPOs among Europe’s largest transactions so far this year.
The largest new listing in Europe this year was the EUR 600m IPO of Lottomatica [BIT:LTMC], which has traded down since listing, far smaller than the mammoth EUR 9bn listing of Porsche [ETR:P911] last year.
Porsche was so big and so high-profile that many investors couldn’t miss out, with its success fuelling the clamour for more large blue-chip names in ECM, laying the groundwork for some of this year’s mega-blocks.
There is a feeling among many bankers that one or two USD 1bn-plus listings would go a long way to pique investor interest. “We are looking for Galderma, Nucera, and the US-listing of ARM later in the year,” said another ECM banker.
But with discounts so wide, sellers coming to market don’t want to sell any more on the cheap than they must. The poor trading of this year’s IPOs does not help with improving confidence.
“The IPO market is traditionally the higher risk product of all ECM products and so it is not surprising to see a lag,” said the second banker. “Uncertain GDP and market moves have made investors far more selective.”
The greater the discount demands, the less sellers want to sell. But the smaller the deals, the harder it is to excite investors, so the vicious cycle continues.
While IPOs continue to befuddle and bemuse, the reopening of the mega-block market has brought some much-needed cheer to European ECM.
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