European IPOs dogged by poor performance
Pilot fishing no longer works; More bookrunners hamper consensus
The successful $10 billion flotation of Swiss commodities trading firm Glencore on May 19 pushed issuance for the year to $17.7 billion and was a much-needed shot in the arm for the European IPO market. But after a string of postponements and poorly performing deals ECM bankers are wary of interpreting the success of the deal more widely as a revival of investors’ appetite for new issues. “Glencore was a deal which was always likely to get done – it’s a must-own asset and the range they set was viewed as attractive by the market,” says Ed Sankey, global co-head of equity syndicate at Deutsche Bank. “Investors prefer large liquid deals in a market where secondary trading volumes have been relatively thin and with uncertainty around the likes of sovereign risk and unrest in the Middle East.”
The mixed fortunes of a number of IPOs this year have shed a harsh light on the process by which these flotations take place. In some cases, most notably the Dkr13.3 billion ($2.5 billion) IPO of private-equity-backed cleaning services firm ISS, bad luck was clearly to blame. The company began its bookbuilding process on March 8, three days before Japan’s devastating earthquake and ensuing nuclear crisis. Despite this, the IPO was oversubscribed within its price range and had attracted demand from more than 150 institutions globally and more than 10,000 retail subscribers in Denmark. Understandably the company decided that it would be unwise to launch the deal in an uncertain environment and risk the ignominy of poor trading in the aftermarket.
What the deal did show – as did Glencore – is that investors have the funds to back new issues when they are presented with a good equity story. “Investors have a preference for large, liquid, scalable investment propositions, so niche or small-cap transactions tend to struggle right now unless they are high-quality businesses offered at sensible valuations,” says Nick Williams, head of ECM for Europe, the Middle East and Africa at Credit Suisse. “But there is no reason to suggest that there isn’t plenty of liquidity available and we expect that to continue with more fund flows into equities.”
When metal miner Nord Gold, pig-iron and coking coal group Koks, and pipe maker ChelPipe pulled their London flotations in early February, they blamed market volatility, investor unease about emerging markets and a lack of demand because of the state’s sell-down of a 10% cent stake in Russian bank VTB. Market volatility has been a convenient excuse used to explain the postponement and poor performance of many deals this year. However the CBOE Volatility Index, the leading indicator of volatility, has been trading at an average of 17.9, below its long-term historical average of 20. Even in the week following the Japanese earthquake it hit an average of only 24.3.
The potential for Russian issues of global depositary receipts to suffer from a lack of liquidity might have played a part but pricing has no doubt been the biggest factor in the success or failure of IPOs, something that is unlikely to change. For a start, investor returns on primary issues have often been negligible or non-existent in recent times. On the day of Glencore’s London Stock Exchange debut on May 19, only one of the 10 largest flotations in Europe this year was trading above its issue price: German property company GSW Immobilien, which raised €468 million on April 15, was trading at €21.50 compared with its issue price of €19. Even Glencore’s 5.5% rise on its opening day of trading was only fleeting – it had fallen back to its issue price of 530p by the end of the day.
The price sensitivity of investors therefore makes it critical that bankers give candid and accurate investor feedback to issuers as they consider whether to launch an issue. But opinion is divided among ECM bankers as to the effectiveness of extensive rounds of pre-marketing and investor education meetings before deals are launched. “There is often a chicken-and-egg situation where investors are waiting for a positive message around the order book before they make up their minds about whether to buy, but it is hard to give them that message because you are waiting for them to place orders,” says one banker.
On big deals where cornerstone investors make large and early commitments it is relatively easy to get a reliable picture, but that isn’t the norm. “Portfolio managers tend to do the detailed valuation work needed to decide if they want to buy a particular equity story at the back end of the IPO process. So you can do lots of initial sounding but until you get on the road with a price range it’s frequently hard to get investors to focus on a deal. Clearly a cornerstone process can help address this,” says Williams.
ECM bankers claim that candour is not a problem in terms of their feedback but the increasing number of banks working on deals might be. “If you have more people giving advice it can inevitably be more difficult to reach consensus,” says Williams. Deutsche’s Sankey says that four banks a deal is enough – some of the pulled deals this year had up to nine.
Rupert Hume Kendall, chairman of global capital markets at Bank of America Merrill Lynch, is more positive about pilot-fishing or pre-sounding but even he admits that the process has become less reliable. “The process of pilot-fishing seems to have fallen into a state of disrepair. If you’ve met with the top 15 to 20 investors in a market on a potential IPO and given that feedback to the issuer you shouldn’t be pulling the deal two weeks later,” he says.
One explanation might be that ECM bankers used to be able to find some room for manoeuvre on one or both sides but this hasn’t been happening. “We normally find that issuers on the one hand and investors on the other are prepared to move a little on price to get a transaction executed – finding that middle ground seems to be getting harder – expectations are often set too far apart,” says Hume Kendall.