Global equity capital markets have been surprisingly rosy so far this year, despite their fair share of challenges. Maartje Bus, Head of Capital Markets, examines the latest developments and the IPO outlook.
- Global growth continues to meet or exceed expectations, as corporates deliver solid earnings across the U.S. and Europe.
- The bottleneck of IPO candidates, emboldened by a strong end to 2017, has presented a challenge in the first few months of the year.
- Expectations for later this year include more investor activism, more alternative financing vehicles, a flat IPO market and a falling secondary market.
Co-ordinated global growth continues to meet or exceed expectations, as corporates deliver solid earnings across the U.S. and Europe. It is the kind of environment that equity investors should love.
Indeed, panelists at the IFR Capital Markets ECM & DCM Roundtables broadly agreed that the macro-economic environment continues to be favorable.
But coming out of such a benevolent 2017, markets are becoming more easily spooked, and the atmosphere is now one of caution and vigilance.
Current ECM picture
Gauging risks is difficult. Asymmetric risks around emerging markets, sanctions against oligarchs, and geopolitical developments in Syria and Korea could all play into the equity picture.
This, in turn, has led to heightened volatility and a price-disconnect between equity issuers and investors.
Investment banking fees were down globally in Q1 as investors took a glass half-empty view of the market. That is not conducive to doing deals.
More recent corporate performance coming out of Europe has further unsettled investor sentiment. The one bright spot is Germany, which has had a strong start of the year based on a few large IPOs.
From a primary market perspective, volatility and other factors are affecting decision-making.
But, while it remains a challenging market for deal-making, the underlying fundamentals are positive.
Fundamentals-focused investors are very receptive to transactions where value is clear. Yet the real question is whether there are enough such investors with a medium-term outlook.
Several panelists predicted failed IPOs in the coming months but were careful to draw a distinction between processes that fail to meet investor requirements — a sign of a well-functioning market — and poor secondary performance following over-zealous marketing of sub-standard assets.
It all comes back to pricing. ‘IPO discounts’ are now being applied in order to compensate investors for volatility.
Another challenge in the first few months of this year has been the bottleneck of IPO candidates, emboldened by a strong end to 2017 and all driving towards a specific window.
As pricing disappoints, the onus is increasingly on advisers to manage expectations early.
Quality vs quantity challenge
In 2014-15, we saw more flow than today, and the market did work.
Panelists discussed that it is not really a function of capacity but about whether people like what they see. There is €300 billion of equity issuance every year — not a low figure.
Despite a rising rate environment, there has been little sign of the anticipated rotation from equities into fixed income.
Impact of passive funds
The trouble is that not all equity inflows are born equal. Ever more funds are passively managed — the bookrunning equivalent of empty calories.
They can soak up trading, but provide no value in terms of pricing or endorsing new issues.
Panelists’ discussed how active funds are needed to invest in transactions and that while the trend towards passives grows, this impairs the price discovery process.
The emergence of deal-oriented hedge funds takes up some slack, but the consensus is that the market needs active long-only funds that are focused on fundamentals.
Cumbersome IPO process
The picture is further confused because it is not always clear when a larger asset manager invests, from which pool of capital within the firm the money is coming.
In Europe, advisers also admit to structural imperfections in their own processes; namely, that the IPO process has become too cumbersome.
The introduction of ‘early-looks’ to assuage investor concerns post-financial crisis have not de-risked the process or created more visibility but they have created a more laborious process. Prepare for the pendulum to swing back.
A clear area of contention among panelists is the utility of large syndicates. On the one hand they are seen as an effective distribution mechanism while others think the extra complexity of managing multiple parties does not justify the benefits.
Expectations for the rest of the year include more investor activism, more corporate activity in the form of carve-outs, spin-offs and acquisitions, more alternative financing vehicles, such as SPACs and private placements, a flat IPO market and a falling secondary market.
We will have to see what the impact is on the secondary markets and subsequent knock on effect on the primary markets. It’s a market with plenty of opportunities and lots of known-unknowns.
We would like to thank our guest speakers and Keith Mullin of KM Capital Markets for moderating the session.
- Craig Coben, Vice Chairman, Global Capital Markets, Bank of America Merrill Lynch
- Suneel Hargunani, Head of EMEA Equity Syndicate, Citigroup
- Christoph Stanger, Co-Head of ECM, EMEA, Goldman Sachs
- Silvia Viviano, Head of ECM Execution, EMEA, JP Morgan
- Luis Vaz Pinto, Deputy Head of Corporate Finance, Global Head of Equity Capital Markets, Societe Generale CIB
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