European ECM issuance is down 36 percent YTD (year-to-date), but senior bankers at the Refinitiv IFR ECM Roundtable believe there is reason for cautious optimism. Leon Saunders Calvert, Global Head of M&A & Capital Raising at Refinitiv brings you the highlights from the event.
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Leading bankers at the latest Refinitiv IFR ECM Roundtable were largely bearish on near-term prospects for European IPOs.
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European ECM issuance is down 36 percent YTD driven by a 43 percent decrease in follow-on offerings YTD.
- There are still European IPOs to be done regardless of the wider economy, helped by a focus on good, meaningful communication with conviction investors.
It has been a difficult few months for European ECM syndicate teams. Many credible IPO candidates have postponed their offering or have been snapped up by private equity, while some of those that did float almost immediately traded down significantly — Funding Circle and Aston Martin to name just two.
The situation is not helped by uninspiring economic data, political uncertainties and poor stock market performance, made all the more conspicuous by a continued U.S. bull run that appears to defy gravity. New issuance activity in Europe is down by more than one third.
As a result, leading bankers at the latest Refinitiv IFR ECM Roundtable, from JPMorgan, Bank of America Merrill Lynch, Goldman Sachs, Citigroup and Société Générale, were largely bearish on near-term prospects. But looking slightly further out, the consensus is one of cautious optimism.
Short-term IPO challenges
Part of the reason for that optimism is that the market has a tendency to over-dramatize short term trends and challenges, such as the fact that a number of pipeline deals were pulled in 2018.
A healthier, and perhaps more accurate way to interpret this information is to acknowledge that there is market discipline implicit in failed and pulled deals which allows it to be self-cleansing.
It drives value in the long run, preventing sub-standard companies from coming to market — a major contributor to the valuation-delta between issuers and investors.
It is natural selection at work. As one panelist put it: “It is difficult to overstate investors’ indifference to a withdrawn transaction.”
Prospects for European IPOs
In addition, from a supply perspective, there are sizeable deals pricing over the next few weeks, including several “jumbo” £6billion-plus deals in Europe. By contrast, the pipeline for mega deals in the otherwise buoyant U.S. market looks much smaller.
The challenge facing issuers and distributors is precisely when demand will reappear. In the meantime, short-term arbitragers are holding sway in early trading, and against a volatile market backdrop, this appears to lead to negative spirals that few have the confidence to reverse.
Naked shorting
However, the panelists scotched any idea that ‘naked shorting’ was a fundamental problem, with one calling them “the Keyser Soze of the capital markets,” in reference to the mysterious protagonist in The Usual Suspects. “I don’t even know if there is naked shorting,” he said. The problem is rather one of pricing and too many quant funds playing in the ECM sandbox, struggling to allocate funds appropriately. That means, when deals ‘break’, everyone runs for the door.
While many funds run long-short strategies, there was also skepticism that a major institution would get a naked short strategy through compliance. However, panelists observed that “by lunchtime” after a float, there is a ‘borrow’ available for funds to short.
Private equity context
While this market can be nerve-wracking for those in the front-line of issuing, distributing and running new public names, it is important to keep in mind the big picture. The IPO market is not a one-day market and the discount-to-fair value will narrow over time. This, in turn, will rebuild confidence.
A more secular threat are private equity funds, which have raised record amounts of acquisition capital recent years, resulting in many companies running a twin-track process and ending up in private hands. But there is a silver-lining here too. As many private equity strategies for growing their portfolio companies are heavily M&A-based, resulting in large market leaders, there is strong potential that they will find their ultimate home is naturally in a listed context.
Into 2019, corporate carve-outs are expected to be a major driver of European IPOs, particularly across Germany and the Nordics, as companies focus on their core competencies and review whether there is greater value in managing the sum of their assets separately. There will also be quality opportunities from among family-owned businesses that are succession planning.
No room for also-rans
But there is little room for also-rans in the European IPO market. Candidates must be major disruptors or remarkable in size or quality to attract attention. The second, third and fourth players in a sub-sector are much more likely to remain in private hands. In addition, deal-makers will not be able to rely on emerging markets, as investors there focus on reducing risk and volatility. Instead, Asia is more a source of competition, with three out five big IPOs from that continent. In the hunt for global quality, the general sentiment is that low-growth Europe has to run twice as hard to keep up.
With indices down year-to-date, it is understandable that investors are jittery and less tolerant of weaker deals. But the difficulties of recent months can too easily be overstated as systemic rather than cyclical. With a focus on good, meaningful communication to conviction investors with staying power, there is no reason the European IPO market should not look forward to 2019 with a sense that there are deals to be done irrespective of whatever the wider economy has in store.
We would like to thank our guest speakers and Keith Mullin of KM Capital Markets for moderating the session.
- Luis Vaz Pinto: Global Head of Equity Capital Markets, Societe Generale CIB
- Silvia Viviano: Head of ECM Execution, EMEA, JP Morgan
- Suneel Hargunani: Head of EMEA Equity Syndicate, Citigroup
- William Smiley: Head of EMEA ABOs, Goldman Sachs
- Craig Coben: Vice Chairman, Global Capital Markets, Bank of America Merrill Lynch
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