When times are tough in the IPO market, issuers in need of cash and bankers in need of fees love a safety net before taking the leap with a deal.
Ideally, an investor commits to taking a sizeable chunk of the shares on offer before books open and agrees to hold on to them for a few months after the transaction is priced. This, sellers hope, will show other investors how desirable the stock is, creating an excess of demand in the aftermarket and a well-supported share price.
In return, the buyers are guaranteed a full allocation once the IPO is priced.
These investors are called cornerstones. In 2021 and 2022, when markets were first overheating, then volatile, and one IPO after the other was postponed, cornerstones played a major role in getting the few remaining deals across the finishing line. Law firm Travers & Smith tentatively estimated in April 2021 that of the 13 IPOs that had used cornerstones in the UK since 2016, eight had been priced in the previous 12 months. In 2022, Technoprobe and De Nora in Italy, Opdenergy in Spain and Porsche in Germany all accepted orders from investors ahead of the official subscription period.
Towards the end of last year, some market participants told GlobalCapital that they expected cornerstones to remain an important theme for new listings in 2023. But now that the first European companies are preparing to float — Ionos in Germany and EuroGroup in Italy — bankers on both deals said they are unlikely to be cornerstoned.
A portfolio manager at a large investment firm, who has supported deals as a cornerstone investor in the past, predicted that investors will agree to this kind of commitment sparingly this year. Even if they do, he continued, they will prefer to remain anonymous until they have regained confidence in IPOs ability to work.
Many buyers who secured large allocations and signed lockup agreements in the past two years had to accept painful losses. An extreme example is Storskogen: the Swedish investment firm sold more than 80% of its $1.5bn IPO to cornerstone investors. Its shares are now trade at around 75% below the initial offer price.
If cornerstones are no longer an option, deals become much scarier for sellers and syndicates in a market that is slowly reopening but still full of uncertainty. However, for the market as a whole, it is a positive development for several reasons.
Locking away a large chunk of shares with one investor limits the liquidity of a stock without guaranteeing strong performance, as many examples of tanking share prices have shown in the past two years. Some have pointed out in conversations with GlobalCapital that it can distort the price discovery process.
A guaranteed allocation makes the playing field more uneven for investors who are unwilling or unable to be cornerstones. Similarly , de-risking a transaction also means increasing the risk that lower quality companies manage to go public and later perform poorly.
Using cornerstones make sense for massive deals and in certain scenarios, such as privatisations of state-controlled companies that can’t be allowed to fail. For some assets, having a strategic long-only investor like a family office or an industry specialist on board can be helpful.
Like the boom of Spacs and the rush into unprofitable growth companies, the omnipresence of cornerstone investors was one of the strange outgrowths of a highly unusual time in equity capital markets.
And like the fall of Spacs and the brutal shunning of empty growth, the fading of cornerstones is a sign of a market that is slowly coming back to healthy activity, where special mechanisms are only used for the special situations they were designed for.