European market hopefuls face harder sell as investors weary of IPO flood

September 7, 2014
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By Freya Berry

LONDON (Reuters) – European stock market listings are kicking off again after a summer break, but many companies hoping to copy successful flotations earlier in the year now have to convince investors weary from a flood of new names and burned by high prices.

Enthusiasm for initial public offerings (IPOs) has quadrupled the amount raised in Europe in the first nine months of this year compared to last to a total of $55.5 billion.

But the sheer number of deals is starting to put fund managers off and prompt fears from bankers that some of their IPO clients will get lost in the noise, with investors simply not able to schedule time to listen to them all.

Alastair Gunn at Jupiter fund management is already suffering from the deluge.

“I’m starting to get a regular stream of stuff coming through the mail,” Gunn, co-manager of Jupiter’s distribution and high income funds, told Reuters.

“When we invest in anything we want to do the legwork, meet the management, understand the business model. But the kind of sausage factory environment we’ve been in is not very conducive to doing your homework.”

Craig Coben, co-head of Global Equity Capital Markets (ECM) at BoA Merrill Lynch sees the problem too.

“With so many IPOs in the pipeline, there is a risk of market indigestion, with the weaker companies and more marginal names finding a less receptive hearing,” said Coben.

“One of the practical challenges will be to carve out the time in investors’ diaries and ensure they can devote the necessary time to analyse and model all of these IPOs.”

TOP DOLLAR

In particular, companies set up with private equity are keen to capitalise on current strong valuations to return money to their founders.

Private equity-backed IPOs have accounted for one-fifth of the total so far this year, the highest proportion since at least 1994, according to Thomson Reuters data, with Carlyle’s UK car services firm RAC, BC Partners’ Italian retail chain Gruppo Coin and Lone Star’s German property business TLG among those being lined up to float in the coming months.

But their emphasis on securing high prices at listing is starting to put off the new investors they need to woo.

Some investors complain that advisers’ strategy of targeting short-term U.S. hedge funds prepared to pay top dollar has in particular forced up the valuation of companies – especially those with a smaller international presence which underperform in the markets once shorter-term funds have moved on.

UK retailer Poundland and Swedish cable operator Com Hem are just some that are now trading below their issue price, making fund managers worry about getting burned by similar patterns in future deals.

“When so many deals start going to discount it’s a signal to the investment bankers that they got it wrong. And I do think they have got it wrong,” said Gunn.

In an August email to bankers, investment firm BlackRock complained to bankers about newly-floated companies missing their first public results forecasts and the stock plummeting subsequently. The email named firms including online travel agency eDreams and Spanish testing business Applus.

“The street should have been more prudent in its forecasts. Some investors have been saying, ‘I wish you guys had priced these things a bit better for us,’” said one equity capital markets banker who declined to be named because of the sensitivity around pricing.

SQUEEZED RETURNS

Paradoxically the same calm market conditions that are encouraging so many IPOs are also making them difficult to support as fund managers struggle to make returns.

Low volatility may boost listing prices, but it also makes it hard for fund managers to justify buying into new companies when it’s hard enough to make gains on tried-and-tested ones.

Even short-term investors have struggled. Hedge funds betting on rises and falls in the equity capital markets have made returns of just 0.8 percent in 2014 so far, according to the Eurekahedge Europe Long Short Equities Index, against a rise of 6.4 percent in the FTSEurofirst 300 Index.

With this in mind, advisers predict that investors will become more selective as they try to improve their returns in what’s left of the year – and that they will be looking for more competitive pricing from stock market-bound companies.

“A lot of the hedge funds have been working their butts off and they’re sitting there with gains of less than two percent,” the banker said.

“I think investors are going to be very demanding, because they need to be.”

(Additional reporting by Nishant Kumar; Graphics by Vincent Flasseur; Editing by Sophie Walker)

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