Europe’s IPO market looks to rebound after year to forget
If it is true that interest rates are near their peak, then hopes of a rebound in the IPO market after another dreadful year may be justified, writes Aidan Gregory. But it will be a while before a full normalisation
The year 2023 will be remembered as a false dawn for equity capital markets, when an expected — and much anticipated — recovery never materialised. So, the focus now turns to 2024, and whether there will finally be a normalisation of ECM’s central pillar — the IPO market.
Respondents to GlobalCapital’s ECM poll at the end of 2022 were confident of an imminent return to normality after a damp squib of a year. Things have not gone to plan.
The conditions under which IPOs should flourish are returning but not quickly enough. Inflation is falling, but it has remained stubbornly high, particularly so in some countries such as the UK. And although the current cycle of monetary tightening by central banks is perhaps near an end, borrowing costs are not expected to fall for a while yet.
Equities have rallied over the year, but the market has remained volatile regardless, with European stocks briefly entering correction territory in the autumn. The conflict in the Middle East between Israel and Hamas has also compounded investor caution, particularly towards new IPOs. It is a harrowing assessment that has left many ECM bankers scratching their heads.
“It is a mixed bag, but I don’t know what else we were expecting — any reopening is always going to have mixed outcomes in its early phases,” says Suneel Hargunani, co-head of EMEA ECM at Citi in London. “Size will continue to be a challenge, given the focus on aftermarket liquidity in Europe. It is a hangover from the 2021 IPO vintage where liquidity is challenged in many stocks.”
Far from frenzy
By mid-November, just $26.3bn had been raised via 169 IPOs in EMEA in 2023, according to Dealogic data. That was down from $40.9bn in 2022, when the Middle East enjoyed an unprecedented boom, and down from $121.7bn in 2021, when the IPO market was at the height of its pandemic era frenzy.
That total made it the slowest year to date for IPOs in EMEA since 2012. While the Middle East has seen fewer deals, it has still made an outsized contribution to IPO volumes in the region, accounting for more than a third of the overall volume.
Although conditions have been far from perfect the market has not completely shut. Some big names took the plunge anyway over the course of the year, with mixed results.
Indeed, some didn’t even get across the line. In the autumn, the IPOs of Planisware and Renk were both pulled, and in November private equity firm CVC took the decision to postpone its jumbo flotation on the Amsterdam Stock Exchange as a direct result of the poor backdrop.
And for many of those issuers that did manage to price their IPOs, such as Schott Pharma in Germany, UK chip maker Arm and German sandal company Birkenstock, which chose to list in New York, the aftermarket has been volatile, and in some cases, disappointing.
“There is still uncertainty on the rate cycle and economic growth,” says Hargunani. “And with geopolitical tensions also, it leads to a more cautious market backdrop. But we have a pipeline. We have seen a pick-up in [requests for proposals] and mandates, and good engagement for early-look meetings, with companies getting ready for first and second quarter IPOs — there is a willingness to move forward if there is confidence in the window.”
Because of the abundance of uncertainty, there is an intense focus on liquidity and quality of individual shares, as well as the expectation of a big IPO discount on each deal. This is likely to remain the case for the foreseeable future, with the IPO market in Europe remaining effectively closed to mid-cap companies.
“There will continue to be a focus on quality assets and anything marginal is not going to meet the high bar investors currently have for IPOs,” says Hargunani. “It will continue to be a buyer’s market when it comes to valuation.”
Nonetheless, there is hope. Half of the respondents to GlobalCapital’s ECM outlook survey for 2024 expect IPO volumes to be at least 20% higher than 2023’s numbers, and two thirds expect an uplift of at least 10%.
In Europe, there is a substantial pipeline of jumbo IPOs, which many are confident will revive the market’s fortunes.
These include the flotation of Swiss skincare business Galderma on the SIX Swiss Exchange, along with CVC, which will try again, and the spin-off of Ampere, Renault’s electric cars business, on the Paris bourse.
There is also the looming privatisation of Athens Airport by the Greek government.
This process of normalisation is likely to be painstaking, with the first quarter of 2024 expected to be slow.
“The return of the IPO market always lags,” says Saadi Soudavar, co-head of EMEA equity capital markets at Deutsche Bank in London. “As investors regain visibility on the macroeconomic outlook and we see a normalisation in the rate and growth environment, we will see IPO volumes pick up.
“We also need a better match between buyer expectations and seller expectations and more data points of successful IPOs. The IPO discount through the first half of 2024 is likely as a result still going to be wider than the oft cited 10%-15% in a more normalised market.”
Indeed, any recovery will take time to bed in. “It will probably not be until 2025 however until we see a fully normalised market, which is also what a lot of our clients are planning for,” Soudavar adds.
Market participants fear poor performance of IPOs in the aftermarket, as well as the ever-prevalent risk of inflation and further interest rate rises as the biggest risk factors for a recovery in new listings.
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Passage of time
A major driver of issuance in the IPO market in 2024 is likely to be flotations of private equity-owned assets in Europe.
There is a substantial pipeline of sponsor backed companies that will need to be listed on the public equity markets so that their private equity owners can exit.
Exit markets for private equity owners have been difficult for such a long period of time that sponsors are under growing pressure to return cash to their investors through disposals.
While some assets can be placed into continuation funds, if need be, private equity must return to the IPO market sooner or later and may eventually have to settle for a valuation discount that previously would have been unpalatable.
“It does not have to be an IPO or outright M&A,” says James Palmer, head of EMEA ECM at Bank of America in London. “The pressure that some sponsors are under to show returns to their LPs is marked, and when the two most traditional ways of doing that are challenged, it becomes a much more difficult and complex process.
“A lot of them are exploring the private markets in the interim, and some firms are under more pressure than others. If you have not returned capital for a long period of time, you are naturally under more pressure. Some people will be forced to test the IPO route.”
There will be a lot of dual track sale processes, but a full, private sale is unsuitable for many assets that are either too large to be acquired, or have no natural industry suitors. With financing costs now so expensive, the appetite of private equity to buy assets from other private equity companies is likely to limited.
Therefore, the IPO market will be the only viable route for many sponsor backed companies.
“In terms of how the sponsors are feeling, there continues to be a strong focus on understanding IPO market sentiment,” says Palmer. “With financing costs much higher, vendors need to assess all options — M&A, IPO, minority — for the best outcome but for some sizeable assets, a deep public equity market may be best.”
EMEA IPO Bookrunners 2023 (year to November 13)
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