U.S. baseball legend Yogi Berra once said of a restaurant, “Nobody goes there anymore. It’s too crowded.” Something similar is happening in Europe’s initial public offering market.
While companies raised the most capital in the last three months since 2006, investors are growing more selective about where they put their money. At least eight companies postponed or withdrew listings last quarter after failing to find buyers, compared with none in the previous period, according to data compiled by Bloomberg. U.K. retailer Fat Face Group Ltd. and Hungarian budget airline Wizz Air Holdings Plc cited market conditions after they pulled their sales.
Companies that did list have little to crow about. Their shares were on average up just 2 percent, while in the first quarter they posted median gains of about 19 percent, the data show. Insurer AA Ltd. (AA/), which raised $2.3 billion in the largest IPO of the last quarter, declined 7 percent on its trading debut and is trading 1.2 percent below offer price.
“I feel genuine IPO fatigue,” said Laurent Millet, co-portfolio manager of the Artemis European Opportunities Fund. “Selectivity is the name of the game.”
The fatigue comes on the heels of a quarter that saw companies in markets from France to Spain raise about $31 billion in 113 IPOs, up from $17 billion in the previous three-month period, the data showed. JPMorgan Chase & Co. (JPM) ranked first in managing the sales last quarter.
Yet as deal activity returned to Europe, some issuers struggled to find investor demand. Merlin Properties SA, a Spanish real estate investment trust, reduced the size of its IPO to 1.25 billion euros ($1.7 billion) from a planned 1.5 billion euros on June 27. The shares fell 3.5 percent on debut.
“The market is probably choking in paper,” Ismael Clemente, chief executive officer of Merlin, told Bloomberg TV this week. “In the last four weeks we’ve been seeing a progressive softening of the IPO market so we decided to shorten the roadshow and go public with what was already in the bag.”
In the first quarter, when the benchmark Stoxx Europe 600 Index rose only 1.8 percent, investors rushed into deals hoping to make an “easy return,” said Craig Coben, head of equity capital markets for EMEA at Bank of America Merrill Lynch.
“Now, institutions are investing in companies, not just participating in deals. Some of the froth in the IPO market has come off,” Coben said in an interview in London.
Investor caution has resulted in more IPOs being priced toward the lower end of their valuation ranges. Sometimes even that doesn’t work. Euronext NV, which raised 845 million euros in one of France’s largest IPOs this year, priced the shares near the bottom of an announced range and has fallen about 6 percent from its trading debut on June 19.
“IPO discounts have not been as attractive as we would like while some have had strategies that are too blue sky for us,” said Nicholas Williams, who didn’t buy any IPOs last quarter as head of the mid and small cap equity team at Barings London.
Another red flag for investors has been a “scattering of profit warnings” among recently IPO-ed companies, he said.
eDreams Odigeo SL, which raised 376 million euros in an IPO in April, said in a June 20 presentation it would have “downward percentage margins” on earnings in the next few quarters, after earlier guiding for stable margins. The stock, which had been trading above the IPO price, has approximately halved in value since its listing.
eDreams, owned by Permira Advisers LLP and Ardian, the private-equity firm formerly known as AXA Private Equity, said on June 24 that the lower margins would only last a quarter.
Private equity owners have had a tough time, too. While they accounted for about 58 percent of IPOs in Europe by capital raised in the second quarter, according to data provided by Ernst and Young LLP, shares have declined on average by 1.6 percent. That compares with gains of 3.6 percent for non-PE backed sales as of June 30, the data showed.
“We tend to be suspicious of private equity-led IPOs,” said Millet. “Private equity is more often than not good at optimizing a company’s cost base and driving margins up, sometimes at the expense of long-term investments.”
As investor appetite decreases, the second half of the year could see the equity markets’ focus shift from IPOs, said Klaus Hessberger, co-head of ECM for EMEA at JP Morgan.
“We expect the second half will be likely characterized by more share placements, convertible issues and capital raisings related to M&A as well as balance sheet strengthenings,” he said.