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Deliveroo woe doesn’t have to shut European IPO market

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By Sam Kerr
06 Apr 2021

The disastrous listing of food delivery app company Deliveroo in London last week sent shockwaves through equity capital markets, with some suggesting it will dampen Europe’s IPO market in the next few weeks. But it needn't be as bad as all that. Investors are keen to take part in IPOs — they just need greater discounts that match their perceptions of risk.

Many bankers and investors speaking before Deliveroo’s IPO will have admitted that the market had become overcooked. Too many deals over too short a period had stretched investors to the limit, with many concerned that valuations were too high.

Bankers admit that the IPO discount, a long-held convention where investors are rewarded for buying large stakes in a unlisted company with a valuation concession, had shrunk so much it was barely noticeable.

Investors also began to notice that IPOs priced in March were beginning to underperform those sold earlier in the year. Investors speaking to GlobalCapital described the IPO market as resembling a bubble.

Deliveroo was the pin that pricked it.

Yes, there were issues with the company that made it an ideal target for investor scepticism, such as concerns surrounding the employment conditions of its delivery drivers or its unusual share structure, but a market pull-back was predicted before the Deliveroo deal.

There is still plenty of IPO business to be done and both bankers and issuers are understandably reluctant to hold back from bringing deals to market.

Nevertheless, bankers must take heed of Deliveroo's experience and tell sellers that they must reset their valuation expectations in line with greater investor scepticism.

That means difficult conversations must be had between banks and clients, as the former reveals the sorts of valuations confidently predicted in the run-up to the deal are now off the table.

But banks are paid to navigate markets and to advise clients on their best course of action.

Telling a client that they have to lower valuation expectations before launching an IPO is a better conversation to have than one explaining why a deal dropped 20% on its first day of trading or had to be cancelled.

If sellers don’t like the revised valuations, they can hold off. That in turn will reduce supply, giving those deals that do go ahead more breathing space and a better chance to perform, which will reinvigorate the IPO market.

If the market takes heed of Deliveroo and resets client valuation expectations then there is every chance that the European IPO market can quickly bounce back from last week’s disappointment.

But if banks ignore Deliveroo as an idiosyncratic anomaly and dismiss investors’ worries about deal fatigue and toppy valuations then they risk doing even greater damage to their market.

By Sam Kerr
06 Apr 2021