Heads on the block

IFR 2007 26 October to 1 November 2013
5 min read
Keith Mullin

The feelgood factor was missing at this year’s IFR ECM conference, writes editor-at-large Keith Mullin.

Keith Mullin

THIS PAST TUESDAY saw IFR’s annual equity capital markets conference take place in London. I’ve been hosting this event for five years now and it’s always a great opportunity to take stock of market sentiment and get some insight into what’s on the industry’s collective mind. I’ve got to say, though, that the feelgood factor was missing from this year’s proceedings.

At last year’s event, the room was full of high expectation and there was lots of optimism expressed around unblocking the pipeline and getting good execution as valuations picked up – all of which was reflected in my upbeat blog at the time. In the event, that’s not how it’s turned out – even if deal volumes are better year-to-date than this time last year.

My first question to our kick-off panel at the conference was geared to getting an understanding of the huge discrepancy between IPO levels and stock market performance. Take a look at the chart. Over the past almost 20 years, it shows stock prices pretty well correlated with IPOs volumes. That correlation has aggressively inverted of late.

Global IPO proceeds are up 19% YTD versus the same period of 2012 (a pretty low base), garnering US$114bn of which 22% in EMEA (versus 36% in the US and 27% in Asia-Pacific). While there was general agreement that flotations would rise in 2014, there was no real conviction around it, to the point where I wondered if the various panels that took to our stage throughout the afternoon really believed it themselves.

THE MOST LIVELY session was the one on block trades. No surprises there as blocks have raised a number of contentious issues over the year. Globally, ABBs including risk blocks have declined as a proportion of overall ECM issuance this year except in Europe, where proceeds have shot up 82% year-on-year to US$89bn equivalent, accounting for about half of all EMEA ECM activity year-to-date.

Many of you will recall that in May this year I wrote a couple of scathingly provocative blogs about the blocks business. At the time I was amused (or was that bemused?) because everyone – with one notable exception – completely agreed with me that blocks were an affront to proper investment banking, a game of Russian roulette and should be wrenched from league tables forthwith to give ECM back its dignity.

I was very flattered at the conference when UniCredit’s Christian Steffens publicly put all the blame on me for creating an air of negativity around blocks. (Thanks, Christian. I never knew I wielded such influence.)

All-in-all, what do ECM bankers need? They need cheering up

JOKING ASIDE, THE session did bring out some interesting perspectives. There was broad agreement on our panel (comprising in addition Sam Dean of Barclays and Suneel Hargunani from Citigroup) that blocks are dangerous transactions to do – about 50% have ended up not fully distributed – but they’re here to stay and will continue to dominate EMEA ECM.

Blocks need to be viewed not as distribution events but as risk-management events insofar as brokers focus on managing unsold portions on the basis deals won’t necessarily clear the market. Other sound-bites from the session:

  • Unsold portions are fine if the broker likes the story and can broke the upside. And getting stuck with a position means the seller has got a very good deal; for the broker it’s good client service.
  • Kamikaze bidding shouldn’t necessarily be seen as banks prepared to take a loss; it’s banks employing what they think are the best tactics to get the deal off to a good start. And Kamikaze bidding is self-policing in that brokers that bid through safety levels tend to be different each time.
  • Messaging during bookbuilding (including covered messages) – for all transactions not just blocks – should be discontinued because it adds nothing and can almost be a “self-fulfilling prophecy of failure” (Sam Dean).
  • Blocks will tend to move to the US model (launch after market close and close before market open) although many investors will struggle to participate on that basis.
  • Brokers don’t bid for blocks purely for league table credit; removing them won’t change anything. If blocks are removed from league tables, extreme behaviour will transfer to other types of ECM, already under pressure on fees.
  • Block trades fill the buyside need for liquidity, hence the increase in number of institutional blocks.
  • Corporates are invariably quite happy to see the back of some large shareholders particularly on the private equity side, and have a more widely distributed and diversified shareholder register.

So there you have it. All-in-all, what do ECM bankers need? They need cheering up. My offer of cocktails after the conference fell on largely deaf ears (maybe it was because it was only 4pm) but still … But come on guys, where’s your sense of fun? It’s not that bad out there …

Global IPO activity and equity market