Shorting and quality are the focus of UK IPO inquest

IFR 2255 13 October to 19 October 2018
6 min read
Owen Wild, Robert Venes

Bankers and investors remain frustrated and baffled by the performance of the recent UK IPOs of Aston Martin Lagonda and Funding Circle, yet the inquest into how two apparently hot deals went so wrong has been overtaken by events as falling equity markets threaten the survival of all live IPOs.

It is, though, impossible to untangle the cancellation last week of IPOs for LeasePlan, Sonae MC and Vannin Capital (and of Xyte the previous week) from the terrible trading performance of high-profile deals that had apparently attracted strong demand.

The club of duff IPOs grew once German online furniture shop Westwing fell more than 10% during its first day of trading on Tuesday. When the stock closed on Tuesday the drop was less than 3%, but by Friday afternoon it was down again – just short of 10% in total. A covered message for the €114m IPO was delivered at 9am London time on the first day of bookbuilding.

The slide of these three deals, which now register losses of 9.7% (Westwing), 15.9% (Funding Circle) and 18.8% for Aston Martin, has led to speculation from bankers about short-selling and frustration that investor conviction in bookbuilding doesn’t follow through to the aftermarket.

“How do investors go from saying I care at £19 [the IPO price for Aston Martin] to doing nothing at £16?” asked one head of ECM on the carmaker’s IPO.

Several bankers involved in the Aston Martin IPO suggest a cause of the fall has been short selling. Some think there has been naked shorting with positions closed intraday, while most point to stock borrow being available within hours of IPOs beginning trading.

The data do seem to support the view that some investors see new issues as a soft target and are taking a pop at them. FIS’ Astec Analytics data showed over 4m Aston Martin shares on loan last Thursday, an increase of 2m on the day when total volume in the stock across trading venues was 6m shares, according to Refinitiv data. The annualised cost of borrowing Aston Martin shares was indicated at 7.3% by FIS on Friday.

Yet other market participants – shocked that several IPOs have traded so poorly when multiple times oversubscribed – are questioning the messaging and quality of demand.

“There are two things that are worrying me about Aston Martin and Funding Circle,” said an IPO adviser. “How do you allocate a well covered book and then fall 10%–20%? And was it a good enough quality book in the first place?

“Are they just being caught out by a rapidly moving market or is it about how banks are allocating deals?”

Bankers on the bust deals insist that the quality was very high on each with household names throughout the books.

Yet an investor at one top tier institution expressed concern that he had been priced out of Funding Circle and Aston Martin, though he wasn’t complaining about avoiding the losses. While not expecting pricing to be set by his firm alone, he was concerned that banks were not listening to the right investor feedback.

It is a view that some bankers share.

“We are still not listening closely enough to what institutions are saying about pricing. We still have a lot of deals which are going out at levels where they shouldn’t,” said Luis Vaz Pinto, global head of ECM at Societe Generale, at IFR’s ECM roundtable last week. “Investors have cottoned on to that and hedge funds go in and take a view, and that has so far proved to be right.”

“Part of the problem is pricing and the composition of the market, with too many quant funds playing in the ECM sandbox. As a result, it becomes a real struggle to allocate books appropriately,” said Craig Coben, vice-chairman of global capital markets at Bank of America Merrill Lynch at the roundtable. “Once deals break, everyone runs for the doors. Investors may have risk appetite but they have no loss tolerance.”

That lack of tolerance results from the poor performance of earlier deals, according to another European IPO investor.

“So far, 2018 is the worst year for IPO performance for us in over a decade,” he said. “When banks push too hard on price on ‘marmite’ IPOs and then you get a long overdue market correction, you get a toxic mix of people who have barely made any P&L all year but with stock on their books who are really hurting.”

On Aston Martin, the second investor said his valuation was £3.8bn, “but when I went in with that number, the banks laughed at me and said, ‘we have people who want to buy at £4.5bn’. Now, it is trading £400m below my bid.”

There was a notable exception to the ECM doom and gloom last week. Knorr-Bremse’s €3.44bn IPO was trading solidly about its issue price on its debut on Friday despite the weak backdrop and potential contagion from the deals that struggled. Bankers involved pointed to the deal’s quality book, although that is exactly what they had said about the earlier deals.

Aston Martin