When a fantastic book means pulling the deal

In On the Genealogy of Morals, philosopher Friedrich Nietzsche argued that language had become corrupted ― words had lost their true meaning.

“The ‘improvement’ of mankind,” he wrote, had led to a “degeneration of language” in which words obscure rather than reveal truth.

Writing in 1887, Nietzsche couldn’t have been thinking about capital markets. Yet recent events highlight a growing disconnect between words and truth in this arena. It is not that the markets are awash with disinformation; rather, accurate information is conveyed, but is bereft of substantive meaning.

This has significant implications for the new issue market. Deals are the most direct form of price discovery, and chatter and guidance are key components of that process.

When communication is corrupted ― not by lies or deception, but by formally true statements ― the process is disrupted. Investors, the intended audience, start to tune out, leading to misunderstandings and recriminations.

The aborted €550m initial public offering of Italian sneaker maker Golden Goose is just the latest illustration of the problem. Despite initial signs of success, the IPO failed because it didn’t generate enough allocable long-only institutional demand to ensure acceptable aftermarket performance.

As the dust settles, it’s worth reviewing what was communicated to the market along the way. It’s important to remember that deal participants are meticulous about ensuring that their statements are true and accurate. Misleading the market could cost them their jobs and even in extremis their freedom, given the rules around market abuse. The challenge, however, lies (no pun intended) in interpreting the truth.

In the case of Golden Goose’s IPO, most of the messaging proved wide of the mark. Last November, when Permira, the company’s private equity owner, chose Bank of America, JP Morgan and Mediobanca as global coordinators for an IPO (UBS joined later), pegged to happen in the first half of 2024, deal participants touted, not so sotto voce, a €3bn valuation. That was at a premium to Moncler, which the Golden Goose deal team saw as the nearest comparable company.

It was a good mark to aim at: the Italian luxury ski jacket maker has nearly quadrupled in value since floating in 2013 and is now worth €15.5bn.

When the deal came close to launch in May, the market was told the offering would raise around €800m, and this was still the case when the intention to float was issued on May 30. Bankers told GlobalCapital then that long-only interest was “ample compared to the deal size, suggesting a positive outcome in terms of aftermarket performance”.

Even in early June, during the week and a half of investor education, the Italian newspaper La Repubblica repeated the €3bn valuation figure, attributing it to “rumours”, although these may have been out of date.

By May and June bankers were telling GlobalCapital Golden Goose would come at a discount to Moncler ― even those close to the deal, though they seemed convinced it would be narrow.

The price range was announced on June 11 at €9.50 to €10.50 a share, implying a €1.7bn to €1.9bn market cap, and a discount to Moncler of 20% to 27%. The deal was to be much smaller as well: a base deal of €500m to €560m, plus a greenshoe option that could have taken it up to €650m.

The drumbeat about strong long-only interest continued, and on June 13 when the book was opened, by 8.20am the leads messaged that the offering was oversubscribed, including the greenshoe, “throughout the price range”.

On the morning of June 18 they gave final price guidance of €9.75 (off the bottom of the range), and said the deal was “multiple times oversubscribed at that level and above”.

Yet despite all the good vibes, the offering was cancelled at the eleventh hour. Permira was very anxious to ensure the stock traded well, and did not believe there was enough long-only demand to make that happen.

Let’s be clear: everything said was almost certainly true. But having a book covered minutes after opening throughout the range, and multiple times covered at and above the final pricing, did not actually mean there was enough solid demand from reliable investors to do the deal at all. The book figures contain so many inflated orders, and give so little granular detail on what kind and quality of investors are buying, that they are next to useless.

When words are unmoored from substance, people stop paying attention.

And this pattern is becoming more common. Underwriters feel compelled to assert an IPO is covered on day one. However, investors know the orders are often fluff and so disregard these coverage messages. Nor do investors pay much heed to valuations floated in the media or by analysts. They’ve stopped listening.

This is problematic for the capital markets. Many funds have teams dedicated to the new issue market. The premise is that investing in new deals can be a source of alpha because a) the offering usually comes at a discount and b) the portfolio managers have a unique understanding of deal dynamics that enables them to play the deal calendar profitably. New issues are one of the last bastions of active, single stock investment.

However, when communication breaks down, when the audience questions what they’re told, when the deal players feel compelled to put a spin on everything, the system falters.

Not long ago, order books would build slowly and steadily, with many successful IPOs getting covered only in the final days of bookbuilding. While order inflation has always been a reality, it was more manageable in the past. Today there’s too much noise interfering with market signals.

Underwriters are under huge pressure to deliver a particular outcome for their clients, especially if they promised a certain size and valuation at the pitch.

The issue is compounded when multiple banks work together on a deal, each with its own competitive agenda. They’re hired to sell stock, and subject to applicable regulation (with which ― just to repeat ― the banks comply assiduously), they must do the bidding of their clients.

The banks are constrained by circumstance. Their individual actions make sense, but the collective effect is to undermine the dialogue and back-and-forth iterations critical to well-functioning new issue markets.

It’s easier to state the problem than to resolve it. But somehow the industry has to find a way to restore meaning to market communication.