The European initial public offering market is in crisis. How else can one describe a situation where approximately half of the deals launched this year have failed completely and, of those deals which managed to make it to market, very few have done what IPOs are supposed to do, which is to price within their initial price range and trade up?
No wonder investors are fed up and issuers are starting to wonder if they shouldn’t pursue other options. This is a serious problem. At a time when the global economy is in desperate need of growth accelerators and financing optionality, can we really afford to see European companies continue to struggle to access the capital and growth opportunities that an IPO provides?
So, what is the problem? Market conditions are, of course, always a major factor. There is no doubt that some deals have fallen foul of periods of severe market disruption. However, many of the IPOs that have failed have done so during periods of relative market calm.
And if markets are so bad, then why are so many IPOs being launched in the first place? The evidence strongly suggests a problem with the process.
It would take much more space than this column affords to cover the whole subject in detail. There are, I believe, many factors at work, some of them extremely subtle.
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In a nutshell, the main issue is that some practices which evolved during the bull-market years continue to exist and need to be challenged. In particular, investors are often not being approached in a constructive way, and syndicate and deal structures are not providing the right framework for issuers to receive the best advice.
An IPO is ultimately a process that aims to find the best possible investors from a public market for a company at a fair price. Attracting such investors requires careful planning. The investor universe is complex, and it is necessary to think intelligently about who the key investors should be for a particular deal and what is going to be the most constructive way to engage with them.
Most importantly, providing an opportunity for buyers to understand the business and meet the management team at an early stage should benefit issuers as well. Large orders for IPOs are major investment decisions, which are not easily made in the rush of the modern IPO marketing timetable. Serious, high-quality investors are much more likely to participate constructively in a deal when they are properly educated.
IPOs are not easy — they are complex and each one is unique, demanding a careful balancing of technical and market judgments tailored to the specific situation. In short, issuers need the best possible advice. In this respect, syndicate and fee structures are critical factors because they need to achieve multiple goals.
The chosen lead banks must feel a real sense of ownership when it comes to achieving a successful outcome — that sounds obvious but may not be the case if too many banks and advisers are involved without their roles and responsibilities being clearly defined. There is also a need for the overall framework of the deal to strike careful balances: it must create enough competition between banks so that they are incentivised to work hard to achieve an optimal result, but not so much competition that it becomes divisive; they must also meet the goals of the issuer while protecting investors’ interests.
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Many recent IPOs have failed to embrace these key concepts. Forms of behaviour have become entrenched and enacting change will now require a deliberate effort from bankers, issuers and investors working together.
However, one step in the right direction, which should be easy to agree on, is to rid the process of the obsession with levels of over-subscription. It is quality, not quantity, of demand that matters and the focus on quantity is leading to seriously skewed results. Providing regular book-build updates became standard practice during the bull- market years and in the process it often inflated demand.
In more difficult times, when investors tend to place their orders late, it can have the opposite effect and may lead to IPOs failing because investors, now used to receiving updates on an almost daily basis, wait to hear a “books covered” message before they are happy to submit an order themselves, triggering a self-fulfilling prophecy of failure. Book updates with price guidance only should be allowed: book updates with levels of subscription should not.
This would force investors to make decisions based on fundamentals, rather than hype, would discourage short-term opportunistic investors, and would help many more IPOs to succeed in a difficult market. And that would be a welcome development for issuers and investors alike.
• Sam Dean is co-head of Equity Capital Markets, Barclays Capital