The IPOs of VW’s truck division Traton and UK transport booking website Trainline were both in the market this week with public cornerstone investors.
Traton secured a €200m order from Swedish pension fund AMF Pensionsförsäkring AB (AMF), valid throughout the price range. Meanwhile, Trainline, which closed books on Thursday, priced with a commitment from Baillie Gifford to purchase shares up to a maximum amount of £200m.
Icelandic meat processing machinery manufacturer Marel also secured two cornerstone orders, from BlackRock and Credit Suisse Asset Management, for its listing in Amsterdam, which was priced last month.
Watches of Switzerland, the UK luxury watch dealer, had no official cornerstones, but was anchored by long-only investors, according to sources speaking to GlobalCapital.
Cornerstone orders backing IPOs at launch are not unheard of in Europe — the flotations of German asset manager DWS in 2017 and utilities firm Innogy in 2016 both attracted cornerstone orders. But it is rare to have so many deals in the market at once backed by such orders.
Some feel it is a trend set to continue given the amount of uncertainty facing markets. “We are at tipping point here — there is a lot more risk in the market and more and more deals are taking this approach in order to de-risk deal execution,” said an investor at a large asset manager in London. “If you look at the history of the IPO market this strategy has largely proved to be effective and if you can do a deal with a cornerstone, it makes an IPO more resilient.
“A cornerstone order gives us liquidity and secures our allocation.”
In a typical IPO, especially those that are very popular, investor orders are scaled back when stock is allocated. This leads to large long-only investors sometimes ending up with a fraction of the shares that they initially wanted.
In the case of a cornerstone order, an investor’s allocation is guaranteed, but they lose some of their power to influence where an IPO prices once a deal range has been published.
“Investors make a cornerstone commitment so they can guarantee and secure allocation and they are prepared to say they are prepared to invest anywhere across the price range within reason to make sure they get that allocation,” said a senior equity syndicate banker in London. "Investors won't always do it because it makes them vulnerable to pricing; you are giving the issuer some pricing power because you are guaranteeing you will take the deal right across the whole range.”
Investors committing across the whole deal price range is one of the dynamics that makes a cornerstone order different from an anchor order, other than a cornerstone order being a public commitment.
"An anchor order is different,” the banker added. “In Trainline for example, there are multiple anchor orders, some bigger than the Ballie Gifford order, but they will have a price limit in there and won't get 100% of their order.”
However, because there are a number of regulatory hurdles to clear in order to be a cornerstone investor, not all buyers will be willing to make the commitment.
“Cornerstone orders are a little bit arduous from a legal perspective,” said the banker. “You have to go through full legal approval and there are documents related to the prospectus so some investors don't want to do that either."
De-risking deals for sellers
European IPOs are generally marketed publicly for around four or five weeks, with books traditionally open for a fortnight, meaning that they are in the market a considerable period and are exposed to volatility.
In previous years that tended not be so much of a problem, but with equity volatility spiking because of geopolitical and economic pressures, sellers are keen to avoid having to pull a deal.
For sellers, securing a cornerstone minimises execution risk, something that has become a priority for bookrunners after a difficult 2018.
There were 64 IPOs withdrawn in EMEA last year according to Dealogic and 296 were priced, a pulled-to-priced ratio of roughly 21.6%.
Banks have stressed throughout the year that they are being especially diligent in what IPOs they bring to market in order to minimise the risk of having to postpone or cancel a deal and have had to be particularly cautious in recent weeks after trade hostility between the US and China re-emerged.
IPO volume is down so far in 2019, as a result of a more cautious sell-side, but pulled deals as a percentage of priced deals has fallen.
In 2018, the pulled-to-priced ratio was 26% by June 20 according to Dealogic figures while in 2019 it is only 10%.
“We have always had an IPO strategy which involves early engagement and getting investors secured early to build momentum,” said a senior equity syndicate banker in London, on a number of live deals. “Recently more investors have been willing to show their hand and commit to guarantee allocation, which also helps the IPO.
“The fundamentals haven't necessarily changed, but there is, in general, a higher bar which you need to clear before launching deals, and that higher bar includes having more comfort on demand.”
However, not all sellers will want to secure cornerstone orders, given it reduces deal liquidity.
In more certain markets, both banks and IPO sellers may choose to go ahead without a committed cornerstone order.
“In other markets we haven't done this because sellers are more comfortable with investor demand, it’s also not just purely about quantum of demand but securing quality as well and building your long-term shareholder base appropriately,” said the second banker. “The reason you are seeing more cornerstones now is that you are going to be on the road with an IPO for two weeks and markets are a bit more volatile. It’s always been a common thing in Asia and isn’t as common here.
“I don't think it will necessarily increase uniformly as a trend, it will vary from deal to deal.”
Other investors follow
Cornerstone orders do not just aide the seller and the cornerstone investor, but also can give other potential IPO investors more confidence in the underlying deal, knowing that there is at least one committed quality shareholder in the register already.
“It is very helpful to have cornerstones in the book,” said a third banker who worked on the Marel listing in Amsterdam. “It gives comfort to other shareholders in the book.
“They are usually very high quality names, such as Credit Suisse Asset Management and BlackRock, so that gives comfort to investors to put orders in. Those investors had done their homework and site visits and were very committed to the equity story.”
The IPO of Network international, the Dubai-based payments that was listed in London in April, gained from a surge of momentum after it announced US firm Mastercard as a cornerstone investor in its IPO.
Network had a huge amount of interest from numerous buy-side accounts during investor education but an announcement on March 27, that Mastercard was willing to buy a stake in Network for $300m to act as a strategic cornerstone, accentuated that interest.
According to bankers speaking to GlobalCapital at the time, a number of West Coast US tech investors expressed an interest in the IPO immediately following the Mastercard announcement.
"Whether a cornerstone orders drives demand from other investors varies on the cornerstone,” said the second banker. “In the case of Network International and Mastercard it drove huge interest because not only was it a validation of the company but was also a strategic partnership which impacted the business.
“But all this depends on the investors and whether it drives demand or whether it simply helps to solidify existing demand.”
Whether cornerstone investors are here to stay in Europe, is not yet known, but in a market where large investors are keen to guarantee IPO allocation and where sellers want to reduce execution risk in volatile markets, cornerstone investments seem a mutually beneficial arrangement for both the buy and sell sides.
Additional reporting by Aidan Gregory