IFR’s annual European ECM conference in late October was perfectly timed to catch the near euphoria in equity markets at the time. Delegates were welcomed with an appearance by Chancellor of the Exchequer George Osborne, before they turned to the issues and challenges of pricing into a rising market in ECM. The day finished with a roundtable to discuss some of the subjects raised during the conference.
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European ECM: on the up
Despite the constant squeeze on fees, the mood was ebullient for the first time in the five years since we have held this conference. Those at the roundtable represented businesses that were better off than they were 12, 24 or 36 months earlier.
Equity markets across Europe rose sharply in 2013, with the euro periphery countries experiencing the best performance. Initial public offering issuance has ridden the wave and leapt year on year. Governments and financial sponsors have capitalised on improved valuations to sell stakes in listed companies, including the long-awaited first sale by the UK government in Lloyds Banking Group and the multi-national restructuring of the EADS shareholder register.
Sales in listed companies inevitably led to a sharp increase in accelerated bookbuilds – the one fly in an ocean of ointment. When 2013 should have been the best year in recent memory for European ECM teams, revenues were often dealt a blow by a misjudged bid when a block of stock was auctioned.
The overnight transaction remains a fundamental weapon in the ECM armoury and, like most weapons, it also has the potential to blow up in one’s face. Fortunately the rising secondary market bailed out even the most spectacular misjudgements.
Compared with underwriting challenging situations for financials and those on the periphery in recent years, ABBs are less fraught with danger as the risk over 24 hours pales in comparison to four weeks or longer. Yet the switch has compressed fees, with more to lose – revenue and reputation – than gain from giant sales.
Liquidity came up throughout the conversation. Money has rushed into European equities pushing up prices, but trading volumes have moved far slower. This has led to even more secondary ABBs as banks have recognised the power of syndicate desks to create liquidity events. Institutional selling has moved increasingly off-market and into the hands of syndicates – sellers don’t want to wait for days to make their exit, while buyers love the opportunity to build a position rather than scrabble around for scraps. The stellar aftermarket performance for Royal Mail to some extent shows what happens when there are just a few buyers but no sellers.
The struggle remains in trying to list new companies that fall below the €500m market capitalisation threshold, and the lack of M&A activity is one of the shortcomings in an otherwise positive 2013. The hope is that acquisitions will pick up to bolster deal totals in the coming year.
But while IPOs continue to put money in the pockets of buyers, the next flotation will be easier – and the fee pot should grow.
For once we hosted a room of smiling faces, each looking forward to the coming months with, not hope, but expectation.
To continue reading this roundtable, click the relevant section. Introduction - Participants - Part 1 - Part 2 - Part 3
