No one expected 2011 to be a record-breaking year in the European equity capital markets. Then again, no one would have wanted the record that was broken: a higher proportion of IPOs postponed rather than priced than any time in the last decade.
Of the 73 companies that got at least as far as beginning pre-marketing a deal of $100m or more, only 42 completed their listings. Arguably worse than that, an index of EMEA IPOs deals that did manage to get listed lost 48% in the year, compared to a 13% loss for the Stoxx Europe 600, according to Bank of America Merrill Lynch research.
Bad luck might have had a lot to do with it. After all, who had the luxury of a four week deal window that wasnt then nailed shut by market volatility? Or else, it could be put down to market conditions in another guise: indices trading cheap but sellers unwilling to accept low-ball valuations. Other bankers privately suggest that many of the companies that had to postpone were not of high enough quality, or not yet ready, for the public markets. From that perspective, it was a good thing that they were winnowed out.
But at the same time, a growing number of ECM bankers have began to question the very mechanics of the IPO process in Europe they preferred, if not to blame the process, at least to suggest ways that market practice could evolve to support new listings even in adverse conditions.
Sam Dean, co-head of ECM at Barclays Capital, has long been a vocal proponent of changing the tried and tested market practices that last year resulted in so many deals faltering. He puts the issue bluntly. "Whats tried and tested about almost every deal failing? Its not tried and tested there are real problems and they need addressing."
The problems had grown throughout the early part of the year Russias Koks and Nord Gold were first to go in February just as the Arab spring and the Japanese nuclear disaster made conditions even worse and led to deal failures for Canal Plus, ISS and Kabel Baden-Württemberg in March. With each failed deal, tempers started to fray. April saw failures for Topaz Energy & Marine, Edwards Group, Skrill Holdings, Euroset and Isovoltaic. And although the £6.2bn IPO of Glencore in May gave reason for cheer, the fact that the deal quickly traded below issue price even if it managed to outperform the metals and mining sector put another downer on the market. It was followed in June by more cancellations of big name deals including Verallia, Atento and Moncler.
By the time Glencore had finished, all parties appeared exasperated.
At the end May, two of the UKs leading fund managers, Luke Chappell and James Macpherson of BlackRock took the unprecedented step of publishing an open letter to banks and advisers, calling for changes in the IPO process (see box). It aimed to create a debate about ways in which to improve the market.
A week later, though, a second document became public, in an entirely different manner from the open letter.
Independent advisers the boutique firms that have in recent years taken on a central position advising many private equity firms and governments on IPO exits have long been resented by ECM investment bankers who blame them for ills ranging from low fees and big syndicates to inappropriate deal allocation and poor aftermarket performance. The criticism flows both ways, though the advisers see banks as conflicted, keen on over-egging their mandate pitches but then delivering cheap stock to their best trading clients.
Part of a pitch book from STJ Advisors, one of the leading firms in the field, found its way on to the internet at the beginning of June. The leak appeared to be explosive. One slide, entitled "qualitative distortion of investor feedback", showed a graphical analysis of investor feedback for an unnamed IPO with the joint bookrunners feedback purported to be a fraction of the true demand. All sides now felt aggrieved and the Eurozone debt crisis was only making markets more difficult.
It probably marked the low point of the year.
But with most bankers and advisers preferring to keep their thoughts private, Bank of America Merrill Lynch put its head above the parapet and gave its account of what needs to change (see box). And by the summer break, at least there could be no griping about specific deals there werent any.
Companies and vendors didnt even get to the point of starting pre-marketing volatility was just too great in the key September/October period. And unlike the US system, which allows firms to publish a registration document early, and then launch and price a deal in a relatively short window, European and UK deals require as long as seven to eight weeks from the moment that analysts are invited to produce research.
It might have done nothing for business, but the extended break gave respite from the negative headlines. It also gave time for the production of a third public contribution to the debate about IPO processes this time from a perhaps more neutral observer, the London Stock Exchange.
The LSE took a leisurely but serious approach after the public debate prompted by the BlackRock letter. It conducted a survey of market participants and carried out its own research, not publishing its recommendations until early December.
Its report was a "call to action", says Tracey Pierce, director of equity primary markets at the LSE, to those involved in IPOs, and was intended to provide more comfort around valuation and help to restore the UKs capital markets reputation.
The LSE divided its recommendations (see box) into four sections, the most eye-catching of which was a call to bring more independent research views into the heart of the listing process.
But while banks and investors agree that independent pre-deal research would be a good thing, they might struggle to persuade issuers of its merits. Advice from bankers that investors would prefer to see some independent research is one thing, but finding issuers brave enough to accept the full scrutiny of the market before pricing is another.
"We will advise issuers there are benefits to having independent research and that it is something institutional investors would like," says Oliver Holbourn, head of ECM syndicate at Bank of America Merrill in London. "I hope that that we will have some vendors and management teams happy to have the debate, although it is a leap of faith given the consequent loss of control over the process."
Some advisers, though, suggest that it is the banks that do not want to see independent brokers providing research for fear of losing control.
The LSE also suggested that the public phase of an IPO from the publication of the intention-to-list and the pre-deal research could be extended to give investors more time to engage with management and company directors.
"Its just a matter of common sense," says Pierce. "If investors want more opportunities to engage, then effectively the roadshow period has to be longer."
Market participants are often frustrated by the UK system which, unlike the US, Hong Kong or some European jurisdictions, doesnt provide an easy route to get information into investors hands before the publication of research.
"In the UK it would be helpful if there was a more formal mechanism for putting information out into the public domain ahead of a transaction as there is, for instance, in France with the document de base or in the US where the prospectus is filed well ahead of time," says Holbourn.
Dean says that the questions might be resolved in a novel way.
"Will companies rush to invite independent research analysts?" he asks. "Many investors would like to see it but I doubt it will happen very often. Were much more likely to find that the need for any pre-deal research at all comes into question. Investors like pre-deal research but given a choice most would choose to have a prospectus in good time over receiving analyst research. IPOs seem to work pretty well in the US without pre-deal research."
As we head into 2012 with many bankers reporting their biggest ever backlog of IPOs, three outcomes are possible. More of the same, as European debt worries keep markets closed. A respite that allows all manner of companies to list with ease. Or oscillation between risk-on and risk-off that allows the most nimble of issuers to achieve success. The smart money is on the last option and anything that IPO market participants can do to encourage a flexible approach, will be welcome for all concerned.
"The good news as far as I am concerned is that in the last six months everyone seems to have finally accepted that it is not just market conditions," says Dean. "There are real problems with the way in which deals are being managed."
|Three proposals for a stronger IPO market|
|BlackRock says: |
Keen to get to know companies at an early stage.
Expects an IPO discount for lack of trading record.
Worried that banks/advisers appointed on unrealistic valuation indications.
Will be "less constructive" on IPOs with big syndicates.
Concerned about structure of incentive fees.
Sees disparity in buyside/sellside expectations of corporate governance and balance sheet structures.
Bank of America Merrill Lynch says:
Early stage meetings for management with investors, perhaps months in advance.
Corporate governance not left as an afterthought.
Clear leadership of (preferably small) syndicates.
Consideration given to independent research views.
Full disclosure of fees and transparency of criteria for discretionary fees.
Advisers role to be clearly agreed ahead of public launch.
The London Stock Exchange says:
More independent research.
Earlier, deeper and wider investor engagement.
Engage with investors on corporate governance at an early stage.
The size of a deal syndicate should be appropriate to the size and requirements of the IPO.
Syndicates should be carefully constructed with clarity of roles and leadership.
Disclosure of fee band to improve transparency.