IFR IPO Roundtable: Part 1
IFR: Whichever seat you are in, it has not been an easy year on the IPO side. What are your initial thoughts on the European IPO market?
DANIEL OAKES, COMMERZBANK: One of the recurring themes is how Europe has fared versus the US and Asia, in terms of opportunities and post-IPO performance. It is interesting today to see that Ducati and Graff are both looking at Hong Kong as a possible listing venue, despite both being European-domiciled corporates.
Some key questions are: Why is it that European IPOs have had generally lacklustre performance? and Why are issuers of more interesting Asia-focused growth stories, choosing non-European listing locations even if they are European headquartered or with European histories?
UTE GERBAULET, COMMERZBANK: In the German market we have seen quite high volumes this year. Even in the beginning of this year when the market was still very stable and receptive, IPOs saw difficulties. So it is not only the macroeconomic sentiment and the high volatility, but structural issues affecting IPOs in Europe.
RALF NACHTIGALL, ROTHSCHILD: I would echo what Ute said. Both banks and investors have had a tremendously challenging year. While consensus seems to currently suggest that China is managing a “soft-landing” and the US economy is slowly improving, the big question mark is obviously Europe.
The extraordinarily difficult environment and very high volatility levels we have seen in the last couple of months have been overlaid with some particular issues relating to specific transactions. This has led to what I would describe as unhelpful finger pointing between the investors and the banks. The market practitioners need to come back to the table and look at the process in order to move things forward in a constructive way, which would clearly be in the interest of all of us.
REINOUT KOOPMANS, JEFFERIES: That is the theme. There are a number of issues we can’t control, like the volatility, the lack of growth – all the external macro stuff we hear so much about. And then there are a number of items that we can fix, can control ourselves. And one major example of this is that, I believe, the IPO model in Europe is broken. It needs fixing. There has been a serious breakdown of trust between issuers, investors and intermediaries. That needs addressing. Even if the volatility came down and growth came back in Europe, the model would still be broken and the distrust would still be there.
ROB LEACH, SAC: As an investor, my main concern is that IPOs in Europe are no longer a profitable business. Years ago they had great attractions and made lots of money for institutions but over the last three years they have destroyed a lot of value. Of all the major IPOs in Europe, roughly €7.7bn of value has been lost in IPOs to date. We are clearly living in a very, very tough market, which doesn‘t help anyone price deals correctly. But there are also some serious issues relating to the quality control of deals coming through.
There are some structural issues in terms of the way transactions are done that can be addressed and there are some great discrepancies in pricing. I think meeting investors’, issuers’ and advisers’ expectations on price has become increasingly hard and this has led to the market coming to this standoff.
Generous pricing for investors achieves a lot – not only on the investors’ side but also for the company in the long term, in terms of establishing a stable shareholder base and getting that relationship off to a good start. IPOs should be a good experience for everyone, not just for bankers and issuers.
ED LAW, KKR: We haven’t been an issuer this year, but as a firm we are very active users of the public markets and of the IPO markets – probably more so than our peers. We have been extremely active in the US this year. But the overall context in Europe is definitely frustrating. Too many deals have been launched that have failed. That isn’t good for the market and it isn’t good for issuers.
The deals that have priced, as Rob said, have not traded well. That isn’t good for investors or issuers, because it undermines future sell downs. The question is whether this is cyclical or structural?
GREG BENNETT, FIDELITY: There is a crisis of confidence in the IPO market. But, intriguingly, that is not just on behalf of the sellers, but the buyers too. For investors, the concern is that we have not been able to earn the appropriate level of return investing in IPOs.
“Appropriate” is the key word there. Obviously we want to make as much money for our investors as possible, but we are not expecting to be given money. But we are expecting to receive an appropriate level of return for the risks associated with an IPO, which are greater than those associated with companies that are already listed.
This crisis could be a catalyst for change. I don’t think wholesale change is needed to the IPO model, which has worked well on many occasions and will work again. But there are specific areas that need improvement, which we will discuss today.
SIMON HAMPTON, JEFFERIES: We are seeing a real mixed bag of companies coming to market this year, and I want to echo the comment about quality control. A number of companies have come to market only to surprise the market with worrying disclosures shortly after. That looks bad on the companies and it looks bad on the bankers involved.
IFR: Let’s elaborate on the types of companies coming to market. How have they performed? Why have they fallen down? Are deals being rushed out? The two investors at the table, do you feel someone has tried to pull the wool over your eyes as to what an asset really is?
BENNETT: Many good companies have come to market over the last decade or so. But in the last 18 to 24 months, particularly, a number of companies have come to market, where the subsequent actions of the management, or subsequent events, be that in their first or second quarterly results, have shown the company is not what we thought it was when we bought it.
We have seen situations where, frankly, our analysis shows the due diligence of the investment bankers has been flawed. We have had some
ery, very active disagreements with some banks about IPOs. We take it extremely seriously when we feel we have been misled by the companies and by the bankers. There are major investment banks whose reputations should be the most important thing they have, but they have not lived up to those reputations.
There have been some failings in due diligence. Whether it is not asking the right questions, or not asking those questions often enough and hard enough. That might get the company an initial response, but does it make sense?
LEACH: We have got to do what Greg says. Ultimately our performance is our main concern and we are responsible for our investments. But in the case of an IPO we rarely get much more than four weeks to analyse a company. So we rely to a large extent on what is documented by the banks and lawyers that have had up to two years with the company to look at these issues. And there are analysts who should show a greater degree of integrity in the way they put together their reports. I think banks are starting to realise they have to step up to the plate in this regard.
IFR: Does the blame lie squarely with the banks? You mentioned that in an ideal world the banks would have two years to work with a company, but there have been instances where a bank is mandated at Christmas for a deal in the first quarter. Can banks force a company to disclose everything in that period? Or is due diligence a process where both parties have to contribute equally?
KOOPMANS: Banks have definitely made mistakes in the last year or 18 months. And banks have been known to walk away from a deal because of the quality of the assets. Six months later they came to market and failed. But on the other hand we need to accept that you will always see some quality opportunities and some lower quality opportunities. That should be communicated and reflected in the price. There should be a range of investment opportunities in the market, with some speculative names as long as there is no fraud, and everything is transparent and clear.
I have spent a lot of time in Russia, some things I have walked away from. Others things I have done realising that they are not the highest quality – but as long as it is clear to everyone and there is a price, then fine. We move on. So it is a little bit of balance.
GERBAULET: Greg just brought up fraud, and that is a difficult issue because you can’t always detect it. As a bank, you have to trust the company and its audited accounts. Sure, you have to question and challenge the figures and the quality of the management and the strategy, but fraud can happen.
This year Commerzbank withdrew from one transaction because we decided it was not appropriate to launch it. But then you have other high quality companies in Germany whose shares have not performed post-IPO although they’ve met all their targets. So clearly it is not always a question of due diligence.
I agree that due diligence is key, and as bankers, we have to make sure our due diligence is really high quality, covering every potential question. Our reputation should be the highest priority, not only profitability.
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