Equity capital markets bankers have in recent weeks told GlobalCapital that they hope next year’s IPO issuers will price smaller deals at lower prices, prioritising aftermarket liquidity and performance. It is a model of going public that has sometimes been referred to as the ‘US-style’ way of doing IPOs in tough markets and it should become the European style too.
The IPO of Springer Nature in October is an example of the technique. The deal was priced at a 50% discount to peers but the supply was kept low, with a deal of just over €520m.
An immediate 8% pop in price followed. The shares were 14% up on the €22.50 IPO price on Thursday.
That leaves big stake holders with a chance to make much more money from future sales than had they sold a bigger slug in the IPO.
Leaving money on the table by pricing small deals conservatively sets the stage for tasty follow-ons down the road.
Overly aggressive pricing leaves little room for growth for investors that are able to pick and choose which deals to buy. Bad performance leaves them with losses, souring the market for future IPOs.
The obsession with maximising proceeds upfront and squeezing every last cent out of the market in the first sale, scares off much prized long-only investors.
But at the same time, sacrificing on size alone doesn't always work — especially in Europe. One of the key issues for European IPOs has always been liquidity.
The risk is that limiting the liquidity upfront will not only long-only institutions form investing but international buyers too.
For better or worse, IPOs are a tough sell. For all the roadshows and glossy prospectuses, investors still find it hard to commit capital to an unproven company. They’re making bets on limited data and this can often lead to overpaying for businesses that stumble once listed.
Companies is already out there and whose stock has a trading history are a much easier buy. That is why block trades in Europe have worked well this year.
By not squeezing every last cent from the market in the IPO, issuers use the market to their advantage over time, using subsequent block trades to make the real money.
As one head of ECM at a European bank put it, “you make the returns on the last trade, not the first”.
If 2024’s IPO hopefuls want to succeed, they need to embrace this approach — one that prioritises the long game over instant gratification. The IPO market's credibility depends on it.