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IPO bankers need to start telling clients 'no'

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By Sam Kerr
22 Jun 2021

The European initial public offering market has been difficult for months, but new listings are still being brought to market with little regard for whether investors want to buy them. Instead of trying to ram deals through to satisfy a pre-arranged timeline, banks should be advising their clients to delay listings that don’t work in these conditions.

The IPO market is said to be "jammed" as investors bemoan "too many deals" taking up valuable time as underwriters try to price them without the support of strong pockets of demand.

This has led some newly floated stocks to perform poorly after pricing.

At the end of last week, the weighted return for the European IPO market for the year to date was just over 7%. Since the disastrous debut of Deliveroo at the end of March, it is just 2.5%. Investors would have enjoyed a better return with an S&P 500 index tracker than a broad IPO buying strategy.

With summer fast approaching, the call from the market is “stop”.  But deals still are being launched, even when many weeks of pre-deal investor education is producing mixed feedback.

Banks say the reason deals are being crammed into the market is that these IPOs are the product of months of work and, like a great cruise liner, they cannot quickly be turned around or stopped.

There might be some truth to that, but at the same time — to extend the metaphor — surely it is imprudent to launch a ship directly into an iceberg.

Bankers must now be honest with many of their IPO clients and tell them that the market has turned to the point where launching a deal in the near future would be counterproductive.

Yes, banks are paid to run a deal. But they are also paid to provide the best possible advice. After all, there is no one in a better position than the syndicate bankers to pass on what they are being told by their investor contacts every day — namely, that the market is broken.

This may make them unpopular, but if they choose to go ahead with an IPO in an unreceptive market, they will not be dealing with a happy client anyway. And as the cruise liner analogy makes clear, waiting until the last minute to break the bad news is also not a good idea.

Some banks have told GlobalCapital that they are now finally delaying listings until the first quarter of 2022, which could be a prudent strategy, given the talk that the September IPO window may be as busy as the pre-summer one we are in now.

If banks wait too long before delaying, they may find that the first quarter of 2022 is also too busy to be confident of execution. It is a delicate balance, but responsible bankers looking at September and fearing a repeat of this IPO season should seriously think about picking up the phone and dishing out a dose of brutal honesty to their clients.

By Sam Kerr
22 Jun 2021