Europe’s IPO market seeks move from crazy to healthy
Few would have expected that, as Europe staggered out of a pandemic, its equity capital market would be roaring hotter than at any point since 2007. But so it was for European IPOs in 2021. Plenty more firms want to float, so 2022 could be just as active. But as Victoria Thiele reports, participants know that it only takes a little volatility — triggered by the emergence of a new Covid variant — or a few failed deals to spoil the party
If 2020 was a surprise for equity capital markets, 2021 was astonishing. A global pandemic has brought, not a stock market rout, but a resilient market, and this year, a riot of deals.
Global issuance surpassed $1tr for the first time in 2020 — this year it is pushing $1.5tr.
The IPO market in EMEA is one of the more sensitive patches — listings in 2020 were sharply down. But in 2021 the market rebounded to its second biggest total ever, narrowly ahead of the last pre-crisis peak in 2007 and only exceeded by 2000.
After a hectic year, European markets are finding their rhythm in the post-pandemic world — or at least they were until the arrival of Omicron.
Deals may not continue to be churned out at the same breathless pace, but banks across Europe are looking at a brimming pipeline for the coming months.
“2022 is likely to once again be a very busy year,” says Aloke Gupte, co-head of EMEA equity capital markets at JP Morgan in London. “Even if there aren’t as many IPOs as this year, it will still be a very elevated number compared to historic averages.”
Bankers and issuers are confident in the strong outlook for IPOs, despite the challenges that have made the market difficult to navigate recently, from investors slumping with fatigue in the summer to the rocky aftermarket performance of some of the hottest IPOs, which led to a series of deals being cancelled in the autumn.
“There is almost a disbelief that the IPOs have worked as well as they have, because of course there was a bit of a stutter in the market in June,” says Jamie Manson-Bahr, head of EMEA equities syndicate at Morgan Stanley in London. “There was just too much coming through and the quality of some assets wasn’t quite good enough. And then a filtering process happened, which I personally think is a healthy thing to happen in capital markets.”
James Palmer, head of EMEA equity capital markets at Bank of America in London, agrees that the autumn hiccups are, in fact, a sign of a market returning to normality after two years of extremes.
“A few deals didn’t get done, but that is natural selection,” says Palmer. “When you have a supportive IPO market, sometimes companies that are a touch too small try to come out, or they are not quite ready for public life, or just candidly not that exciting companies. So if the market is turning them down, that is a perfectly healthy sign.”
Several IPOs that were discussed for the second half of 2021, but never launched, could surface again in the year ahead.
“Particularly in this third quarter, a lot of IPOs never came to market,” says Andreas Bernstorff, head of equity capital markets at BNP Paribas in London. “So there is a bit of attrition that has been pushed into next year anyway.
“And if we look at the pipeline for the first half, we’ve got a significant number of pretty interesting and large IPOs. I would say we will see another year of above average activity if the market remains reasonably supportive.”
The future is tech
Growth stocks, especially tech companies, will play a big role in 2022’s market. On that point, market players are unanimous.
“I kid you not — in 2016 you could literally count less than 10 proper large tech companies listed, all across Europe,” says a head of ECM in London. “That number has gone out of sight — not so much the number of IPOs that you’ve seen, but the number of IPOs to come is massive. That structural shift started in the US and Asia probably five years before it started in Europe, but now it has a massive momentum behind it.”
Some claim that while Europe’s tech IPOs have still not caught up with the US in quantity, they have overtaken it in quality, and that is attracting the attention of choosy investors.
“Tech stocks have always been important in Europe,” says Manson-Bahr. “There have been less of them than in the US, but Europe has some exciting unicorn businesses, whether that be in the private space like Revolut, or in the public space like AutoStore — that’s a fantastic business. People are seeking out unique assets and that will continue.”
Tech companies made up the largest group of new listings in EMEA this year, according to Dealogic data, at 28% of all IPOs by volume and 31% by number. They raised €26bn, up 160% from 2020, itself a record year.
Gupte says this is part of a deeper structural shift. “You are seeing the digitisation of the whole economy, so you are going to continue to see a lot of IPOs in tech verticals,” he says. “I also expect to see a lot of [activity] around energy transition and climate tech. But the economy is solid, hence all sectors are likely to be busy.”
The Digital Economy and Society Index tracks how much work has been done and how much is still to do in the digital transformation of Europe.
In Germany, for example, only 18% of businesses send electronic invoices. As long as Europe still has these analogue companies, tech stocks will stand out as a distinctive new feature in the market. But as digitisation progresses, the concept will lose its significance.
“The days when you could easily define what is a tech company and what isn’t are gone,” says Palmer. “There isn’t really a company on the planet that can’t have a proper tech strategy or tech-related approach to their business.”
He adds: “The importance of tech is continuing, but perhaps with less visibility than we had going into last year. That is no rotation, but evidence of a healthy IPO market where you have a breadth of sectors and sub-sectors.”
All eyes on growth
Despite the boom in tech listings, some of the most hyped deals from early 2020 have lost investors money. Personalised greetings card maker Moonpig, cosmetics retailer THG, ratings service Trustpilot and car dealer Auto1 have all underperformed expectations.
They have been knocked partly by the sweeping rotation out of growth stocks and into value that has jumbled up global equity markets as investors have shifted from pandemic mode to recovery.
ECM deals caught in the crosswinds have suffered. Tech sector equity block trades in EMEA, for example, have on average fallen in price within a month of the deal in the second and third quarters, while non-tech trades have yielded positive returns.
But the planning for 2022’s IPO market seems untouched by this.
“Strangely, the pipeline looks rather similar in terms of sectors,” says Bernstorff. “We’ve got a lot of growth — tech, media and healthcare remain reasonably dominant. The thing that didn’t happen last year, despite us having a go at it, was a broadening of sectors in terms of value sectors or more cyclicals.
“It is going to be interesting to see if the market resets away from growth to more value or cashflow or dividend,” he adds, “whether the IPO candidates can adjust to that. But right now, there is not much evidence for that.”
Other bankers share the impression.
“Growth is the number one priority driving investor interest,” says Gupte. “Of course the market wants to see efficient business models, they want to see a path to profitability amongst other things, but if I had to pick one single factor that is in the spotlight, it is growth. That is not expected to change.”
The wizards behind the IPO market’s bonanza are central banks. They have supported the global economic recovery with generous bond purchasing programmes and low interest rates, soothing investors’ fears and making them eager to take risk.
Stockmarket indices have notched one all-time high after another, helping IPOs in the EMEA region to raise more than €93bn in over 530 deals by late November.
In this inherently cyclical market, the inevitable questions are: when will the train derail, and what might cause it?
“Volatility is the enemy of all IPOs,” says Manson-Bahr. “There is a risk that we’re going to be in a potentially more volatile market than we have seen for a while. We’re pretty bullish on earnings for next year. As a house we are forecasting 10% earnings growth across Europe. But you’ve got a lot more macro cross-currents coming through.”
So far, the market seems remarkably unfazed by macroeconomic concerns. The US market hardly blinked when the Fed began openly considering a sooner-than-expected interest rate hike. In Europe, where the ECB so far promises no rises in 2022, investors seem even more relaxed.
“I was told many years ago: the US 10 year bond tells you everything,” says Palmer. “I continue to believe that. There is a lot of talk about inflation and related interest rate changes in that context, but the US 10 year continues to bounce around 1.6%, which in the context of what inflation is, is basically very cheap money. As long as money is cheap, equities will continue to perform, which obviously is a supporting backdrop for the IPO market.”
In the past few weeks, earnings seem to have put investor concerns to rest.
“It has been noticeable just how reticent investors have been — careful and cautious,” says Bernstorff. “We saw that massively in the IPO window from around the last week of September to the end of October, when investors were nearly not playing at all. And then suddenly Q3 numbers came out, and suddenly everyone got their mojo back and hedge funds were back putting money to work.”
Gupte points to it too. “In Q3, two out of three companies [in Europe] beat their estimates, which indicates an upside in operational performance for many sectors heading into 2022. I think corporate confidence across the board, across sectors seems to be very solid.”
Keeping up with the neighbours
As well as its strong sectoral tilt, and related to it, the IPO market has also had a strong north-south divide over the last year. The UK leads the EMEA ranking, with Sweden, the Netherlands, Germany, Norway and France filling up the top slots. Together, they account for more than 75% of all issuance.
Italy, the fourth largest economy in Europe, is in 14th place, with €1.3bn raised in 32 IPOs. In Spain, only four companies went public, out of which the photovoltaic plant installer Acciona Energia raised €1.5bn, the other three a combined €150m.
In 2022, southern Europe is expected to come further out of its shell.
“I think Italy will be a lot busier in 2022 than it was in 2021, and the same goes for Spain,” says a head of ECM in London. “But if you look at the big tech hubs in Europe, you have a large number of companies that are London-centric. Then you’ve got an exciting and active scene in Germany. Finally, you’ve got the Nordic companies, where you have some really big tech giants and lots of tech IPOs. I don’t think that structural mix will change.”
Still, a few successful deals should encourage more issuers in the south to consider going public.
“Italy has seen a scarcity of IPOs in the last couple of years,” says Bernstorff, “so getting Intercos done, which we did a couple of weeks ago, and Ariston, which is in the market right now, that would be a big vote of confidence in that market, where we will start seeing things working again.”
Intercos is a cosmetics manufacturer, while Ariston makes boilers.
“Italy and Spain tend to be quite patchy in terms of IPOs and there wasn’t that much this year,” Bernstorff adds. “I think from all we can see, there is actually quite a lot that could come in both markets. So I think that gap will not widen, it will narrow.”
In the recovery-induced rush of euphoria in the first half of the year, the US craze for special purpose acquisition companies spilled over to Europe, before running out of steam in the summer, giving the market pangs of self-doubt.
Spacs show a tendency to do better in more investor-friendly conditions. There was a three month spell without any deals, before the Disruptive Capital Acquisition Co restarted things in October. To sweeten its deal, it introduced to Europe ‘overfunding’ — a technique in which the pre-IPO sponsors put in a little extra money so that IPO investors make a small return even if they decide to redeem their shares, in this case 2.5%.
Spacs have been priced here and there in Europe since. The most recent examples, both in Amsterdam in November, were Spear Investments, which raised €175m, and European Healthcare Acquisition & Growth, fetching €200m.
Existing Spacs are also continuing to find acquisitions, too, such as 468 Spac, which is buying Boxine, a German children’s entertainment firm, now renamed Tonies.
Palmer says: “There is increasing evidence that there is room for a Spac market in Europe, but activity levels will remain relatively low.”
While lacking the popularity they enjoy in the US, Spacs are on the way to establishing a foothold for themselves.
“There have been one or two new Spacs [recently], far less than were in the pipeline,” says Bernstorff. “But nevertheless, the market isn’t totally gone. I think you’re going to see a concentration amongst repeat issuers. So when they go around and see hedge funds, they already have a track record and a reputation to go on. But I don’t think we’re going to see that level of activity again that we saw at the beginning of this year.”
Bernstorff adds: “There is a far better understanding now of what Spacs can do, but also what they cannot do and what problems they don’t solve. It is important that the de-Spac-ing process is often longer and much more complex than the principals thought it would be. They’ve earned themselves perspective and a certain niche —but it is a niche.”
The development of Spacs in 2021 is remarkable in a region that is still finding its balance after the greatest turbulence in financial markets for a decade.
Without knowing the full impact of Omicron, Europe is looking forward now to another busy year, with a market that is less intense, but healthier in weeding out companies that are not ready to go public. It is likely to support firms across sectors and regions that are fit for a future defined by secular trends, above all the energy transition and digitisation.
“The shape of the IPO market going into 2022 is likely to look more similar to the second half of this year than the first half,” says Stephane Gruffat, co-head of ECM EMEA at Deutsche Bank in London. “The tone has become more selective and focused on structural winners and category leaders. We see the pipeline as generally high quality for the first half of next year. There are a number of great companies which are very public market-ready.” GC