IPO techniques adapt to tough market conditions
After the second half of last year proved a real headache for primary issuance, participants in the European IPO market are readying themselves to brave markets that could be just as choppy in the first half of 2016. As Olivier Holmey reports, some of 2015’s innovations are likely to become widespread.
Market conditions aren’t about to ease any time soon. That is the message every equity capital markets banker wanted to convey at the end of last year.
And yet the message came with a postscript, one of hope: IPO bankers are increasingly confident in their ability to price deals in tough markets. If late 2015 taught them anything, that was it.
When asked what were the defining trends going into 2016, Henrik Gobel, co-head of capital markets in Europe, the Middle East and Africa at Morgan Stanley, immediately says: “IPO flexibility.”
“A lot more flexibility had been built into the IPO market last year,” Gobel explains. “The size and pricing are more flexible; the bank groups on deals are more streamlined.”
This trend will likely resume in the new year, he says. To the ECM community, it is crucial that it does. For these changes played a large part in keeping the market open in the final, difficult months of 2015.
In early November, one IPO banker said: “The market should have closed about a month ago!” He could hardly contain his incredulity at the market’s resilience to nasty headlines and nervous secondary markets. In 2016, bankers will again likely have to fight hard to keep it open.
Coping with challenge
Things started to go awry in the summer. In late August, Chinese stocks collapsed as the slowdown of the nation’s economy set off panic among investors. That sent shockwaves across markets worldwide, and drove down commodity stocks. Simultaneously, the price of oil resumed its fall. Then came the news that Volkswagen had manipulated emissions tests. The car manufacturing sector, and all parts of the economy linked to it, suffered as a result, further hurting ECM.
That put equity teams to the test.
“Execution came to the fore in the second half of the year,” says Suneel Hargunani, head of equity syndicate EMEA at Citi in London. “We’ve had to be careful in how we do deals, as volatility increased and market conditions worsened.”
Hargunani’s colleagues agree. Andreas Bernstorff, head of Germanic and Nordic equity capital markets at the bank, says: “Q3 was a challenging quarter, people were worried about China.” And the fourth quarter was hardly better.
Bankers say the latter part of 2015 gives an indication of what early 2016 could look like: a large number of IPOs launched, each with a limited chance of actually pricing.
The ECM world won’t give up on bringing new deals, though, so what it is setting out to do now is increase the odds, through skilful execution, of each deal’s success.
“As long as the market is open, issuers have a natural desire to press ahead if at all possible,” says Tom Johnson, co-head of equity capital markets EMEA at Barclays in London.
Commenting on the last few months of the year, he says “it was a case of making sure that when the final decision about launching was made, we were clear with clients about where investors’ valuation expectations were likely to be, so that then they could make an informed choice about whether to move forward or not.”
Johnson says multiple methods are being used to “derisk” the market. These were especially useful in late 2015 for mid-cap issuers, whose small size and illiquidity rendered them unappealing to investors, by then only interested in the safest and largest assets.
He gives the example of the Gym Group, the low cost gyms business in the UK, which raised £125m in a London IPO in November. The deal’s price and size were set from the beginning.
“It was all about de-risking the outcome, knowing that we would launch a deal that was certain to price,” says Johnson. “But to do that we had to agree on a price with anchor investors before going out with the final bookbuild.”
Had volatility not been so high in the autumn, the bankers would have played the deal very differently: with a price-finding bookbuilding phase.
By some estimates, half of all listings launched after the summer still got pulled, but that number would likely have been higher, had market participants not been able to adapt in this way.
Javier Martinez-Piqueras, co-head of European ECM and corporate solutions at UBS, points out that “when the market becomes volatile, IPOs tend to struggle more than other types of deals, because they are in the market for longer”.
That is unlikely to change any time soon. As Gobel says: “We would all love to get over pre-deal research, [and move to] the US model, but it’s not going to happen. We’d need a proper securities filing system like in the US. In the US, two weeks and you’re done. In Europe, two weeks won’t do.”
That is one of the reasons it is extremely important for IPO specialists to learn to cope with market challenges.
The size and pricing of several deals were changed to appeal to investors. Three German IPOs, of ball bearings maker Schaeffler, polymers manufacturer Covestro and container shipping line Hapag-Lloyd, were shrunk in order to get done. To price, in spite of heightened volatility and the Volkswagen scandal, the sellers were willing to compromise on size, and the bankers were able to cut the number of shares on offer to cope with the weak investor demand.
UK car insurer Hastings, meanwhile, priced its deal below the range.
What to expect
There is perhaps something positive to take out of the sheer number of deals pulled last year: some will hope to float again in 2016. They may already be readying early January launches.
Pulled deals include HelloFresh, the online grocery delivery business, Latvia’s Citadele Banka, telecoms towers business Helios Towers Nigeria, French music streaming system Deezer and Sorgente RES, the Italian real estate company. Not all will return, but some of them will, bankers say.
On top of those, new names are preparing deals. Among them are UK challenger bank Metro Bank, German packaging business Mauser Group and Polish healthcare group Master Pharm, to name but a few.
Some large deals could also come. Among them are Italian bank Banca Popolare de Vicenza, Denmark’s largest energy company, Dong Energy, and German high performance ceramics maker CeramTec. CMC Markets, the online trading firm, could also be one.
“A lot of the [private equity] portfolio companies have already come to market,” Gobel says. “But I’m still spending a lot of time with potential issuers thinking about listing interesting, investable companies in 2016. The IPO pipeline is building very nicely.”
Barclays’ Johnson agrees. “There is still a good backlog of companies that want to come to market, a mixture of private equity and privatisation issuance, which are going to make up the majority of IPO issuance again,” he says.
To him, what matters is that the end of 2015 was tough, but workable. And that, of the seven deals Barclays priced after the summer, only two fell on the start of trading, and all seven rose above their offer prices by late November.
“The market uncertainty is still very much there,” Johnson says. “But I think the fact that people have tended to make some money out of this latest batch of IPOs will hopefully give us a chance to kick off the new year with a bit more positivity.”