31 July 2017
IPO Data Analysis — Part II: IPO pipeline well-stocked, but investor fatigue looms
Below is Part II of II of our 1H17 Europe IPO analysis, this time looking ahead to the end of the year, with data provided by Mergermarket.
∙ Pilot-fishing going overboard, wearing buysiders down
∙ International listings in London on the rise
∙ Pirelli, ADNOC, this year; Deutsche AM, HelloFresh 2018
If July activity is any indication, the second half of 2017 promises to be equally as busy as the first.
More money was raised in IPOs this July than over the whole of 3Q16, with the tally already at EUR 3.87bn compared with EUR 3.8bn over the entire quarter in 2016, according to Mergermarket data.
Companies that shied away from a listing in the immediate aftermath of Brexit will undoubtedly continue to take advantage of the surprising calm on the capital markets.
The assets coming out of private equity sponsors have dried up a bit, while corporate issuance has picked up, European co-head of ECM at Deutsche Bank Josef Ritter added, saying that the latter is always a bit more episodic and unpredictable.
Private equity exits are likely to pick up again next year, fellow Deutsche co-head Edward Sankey said, adding that faster turnarounds are becoming more prevalent.
In a shift from 2016, dual-track processes have swung the way of an IPO more and more often again, Capital Markets Partner at Hogan Lovells Maegen Morrison noted. She has also seen a bit more realism in the market about valuations, narrowing the gap between seller and buyer expectations.
This is likely a function of more wall-crossing and very early-look meetings with investors, she said. However, there are also downsides to this approach, she conceded.
One major problem is that investors are getting fatigued with the sheer number of pilotfishing meetings being requested, Ritter said.
IPO activity on the London exchange has been robust in spite of Brexit uncertainty, Morrison said, adding that London could lure some tech companies away from the US.
Recently, the listings of major tech businesses such as Snap [NYSE:SNAP] and Blue Apron [NYSE:APRN] across the Atlantic have not fared very well. In contrast, the biggest UK tech IPO in years, Alfa Financial Software [LON:ALFA] got off to a good start in May.
Some of the assets in the market likely to make waves include Italian tyre maker Pirelli, the retail service stations arm of UAE oil business ADNOC and consumer insurance company BGL Group.
Notably, Pirelli’s owner ChemChina brought forward its listing plans from the original 2018 target to 4Q17 because of “positive results” and “favourable market dynamics”.
Cinema chain Vue Entertainment could go for an IPO either this year or the next, as with meal kit deliverer HelloFresh, which will likely let the dust settle on Blue Apron's fiasco overseas.
Deutsche Asset Management also looks like it could slip into 2018. Deutsche Bank CEO John Cryan said the process is “on track” on a conference call last week. But timing “will be influenced by market considerations and by the need to obtain regulatory sign off”, making an IPO this year “unlikely”.
The major downside of a supportive market for IPOs is that the quality of the assets is not always as good as investors hope, Investment Manager European Equities at Standard Life Investments, Will James, cautioned. “You have to ask yourself when looking at things like Pirelli and Deutsche AM, are these assets coming to market because they are in a good place, or because they can?” he concluded.
More and more foreign businesses are looking at the London Stock Exchange, such as Dubai-based oil & gas drilling company ADES International [LON:ADES], fast food enterprise DP Eurasia and Global Ports, both Turkish.
In terms of international listings London is certainly holding its own, Morrison said.
We mustn’t forget Saudi Aramco is also eyeing LSE as a possible home for its shares. “While their interest in London shows its continued attractiveness post-Brexit, there are some legitimate corporate governance concerns, which must not be swept under the rug,” Morrison said.
The Financial Conduct Authority recently proposed “a new category within its premium listing regime to cater for companies controlled by a shareholder that is a sovereign country”, which seems to be paving the way for Aramco.
Russia in particular could benefit from this trend. “This year has seen capital flowing back into emerging markets for the first time in a while,” said Alex Metherell, Co-Head of Global Banking at VTB Capital. Russia in particular has been re-entering the European capital market scene more strongly as the ruble is relatively stable, and the general macroeconomic factors are also stable, including oil.
Several Russian companies are mulling a stock market debut, including energy and aluminium holding company EN+ Group, UCL Holding’s railway and shipping arms, Rostelecom’s [MCX:RTKM] data centre services unit SafeData and AFK Sistema’s [MCX:AFKS] agricultural holding Steppe.
Many Russian assets are relatively cheaper than those in the West, often with good fundamentals and a solid dividend policy, Metherell said, adding that Russian companies are keen to engage with foreign investors and increase exports.
Another space that is gathering pace is the creation of special purpose acquisition company (SPAC) vehicles, Morrison said. Assets are fairly cheap and with a lot of money coming in from the US, we are seeing more SPAC floats, swiftly followed by a big acquisition, she continued.
So long as interest rates stay low and quantitative easing keeps providing liquidity, investors will want to put their money to work. However, the past six months have shown the buyside to be price sensitive and wary of the quality of assets.