Europe on final approach to ‘normalised’ IPO market after troubles

Equity capital market participants are confident that 2025’s IPO market will be the last step on the way to a yearned for “normalised” IPO market. But with investors selective about their participation in IPOs, and a stubborn gap in valuations between them and sellers, it may be more likely that a serious, sustained recovery in new listings will come in 2026 and 2027.

Some respondents to GlobalCapital’s equity capital markets survey are hopeful — though not confident — that the disparity between buyers and sellers in valuations will substantially tighten (27%) or slightly tighten (41%), helping to increase deal flow. All other respondents thought the valuation gap would stay the same; none expect it to widen.

Market participants speaking with GlobalCapital expect that IPO issuers will focus on pricing small deal sizes at attractive prices that can soar in the aftermarket, in an effort to gain investors’ trust.

IPO issuers had printed $30bn-equivalent via 170 IPOs in EMEA by mid-November 2024, according to Dealogic, just 14% higher than by the same point in 2023.

Indeed, while the IPO market has been more positive this year than in 2023, “it is still far from being open to everyone,” says Andrew Briscoe, head of EMEA equity capital markets syndicate at Bank of America. “We have taken a step in the right direction this year, but there is still some way to go.”

“I don’t think it is what anyone expected,” says Andreas Bernstorff, head of equity capital markets at BNP Paribas in London.

Indeed, in GlobalCapital’s survey in 2023, market participants largely expected a stronger and more sustained IPO recovery for 2024 than eventually happened. Half of last year’s survey respondents expected IPO volumes to be at least 20% higher than 2023’s numbers, and two-thirds expected an uplift of at least 10%.

It did not come to pass. This was because interest rates did not fall as quickly as many expected. The ECB did not begin cutting rates until July and the US Federal Reserve in September.

At the same time, this year’s stock markets were characterised by a huge expansion in the multiples and earnings of companies clustered around artificial intelligence. Whether it was chip makers or AI-adjacent stocks, they drove up global indices. By the end of November, shares in Apple were up by 26.4% year-to-date. Alphabet was up by 22.3%, Meta 63.7% and Nvidia 174.2%.

The result was a situation where although markets were going up, it was mainly because of large cap companies’ share price growth; mid-cap stocks were not rising. That made IPOs less successful than index performance suggested they might have been.

“Next year, we will continue moving into a more normalised market environment,” says Luca Erpici, co-head of EMEA equity capital markets at Jefferies. “If you look at the IPO cycle over the last 20 years, you have a peak every six to seven years, with a more normalised market three years after the prior peak, which was 2021.”

Respondents to GlobalCapital’s survey this year were near unanimous in forecasting that IPO issuance will rise next year. Half of respondents expect IPO volumes of at least 10% more in 2025 than in 2024 and 41% expect a lift of more than 20%.

The pipeline supports the hypothesis that 2026 and 2027 will be better years for IPO volumes than 2025, however. A substantial pipeline of “good quality, very sizeable assets” is being readied for public listing in the next three years, Erpici says.

Bernstorff also described a “substantial pipeline of transactions” but with deals to come sooner. He is expecting “some congestion” in the IPO market in 2025.

While the IPO market is more open than it was a year ago, new listings still need close to Goldilocks conditions to be priced. Issuers must demonstrate the right mix of having a quality, durable business model; come looking for a reasonable valuation; have low leverage but large scale; and present either a nearly or entirely derisked deal, especially if they do not operate in what Erpici describes as “must-own” sectors.

“We are in a market where some assets can list and trade well, but a lot cannot yet achieve a successful outcome,” Briscoe says. “I hope we see an increase in the market’s depth, such that it isn’t only the best-in-class assets that can list successfully. We are seeing signs that decent enough assets are getting receptivity, which is encouraging, but we aren’t quite there yet.

“Perhaps the market will be receptive to smaller deals where the aftermarket is paramount, and the bigger monetisations happen post-listing”.

The €521.75m IPO of German scientific publisher Springer Nature in October was a case in point, having come “really cheap”, at a 50% discount to one of its key peers, Bernstorff says. By mid-November, the stock was up 12.5% from the offer price.

“That was a sensible, US-style way of going public in a challenging market: sell as little as possible at an attractive price for investors,” he added.

“The biggest driver of liquidity is aftermarket performance — not size of free float, as is so often assumed — and liquidity is the biggest pushback we face in a European IPO context these days,” Briscoe says.

Small deal sizes allow issuers to come back and sell more stock at higher prices later on. “I would like to see smaller deals that trade well in 2025,” said one market source. “That stuff can trade well and you gain a lot of goodwill in the market.”

In tune with prioritising aftermarket liquidity, survey respondents thought that securing cornerstone and anchor investments (36%) and collecting a high quality order book (23%) are going to be front of mind for 2025’s issuers.

Whether it was a deal being pulled, or trading poorly in the aftermarket, the root of this year’s IPO woes has been a disconnect between buyers and sellers. Along with growing uncertainty over geopolitical risk, it could have a big effect on IPOs in 2025, with 82% of respondents saying that the gap between bids and asks is the biggest threat to IPO volumes over the coming year.

But investors have generally made money this year, Bernstorff says, and their willingness to allocate cash to a new deal is much higher than at this time in 2023.

While risk appetite is improving, investors are expected to continue being selective on low-quality assets, however. Investors are to remain price sensitive, and “pretty short term and momentum focused”, Bernstorff says.

He adds that he doesn’t think the next wave of IPOs will reach the level of being priced at a 10%-15% discount to peers — the discount generally considered emblematic of a normal market — though he thinks a few will. “But, certainly, we are going to get the average inside 20%,” he adds, suggesting that such a discount would help issuers grow comfortable with coming to market.

Indeed, 81% of survey participants said that an attractive discount was by far one of the most important features investors will consider.

This will result in an open market, but not open to all. “The IPO market is open, but investors aren’t underwriting anything because of fear of missing out,” Erpici says. “There is a healthier dynamic where we can match buyers and sellers — but only around the right situations at the right price.”

One source of listings could be private equity-owned assets. “IPO discussions with private equity are intensifying a lot,” Erpici says.

Even for assets that weren’t considered IPO candidates, private equity sponsors are “warming up to the idea that IPOs are a viable option”, particularly for some of the largest and best quality assets out there, he adds.

Heading into 2024, the market expected that PE funds would be a rich source of deals as they sought to exit investments in companies and return money to their investors. But sponsored companies’ capital structures, leverage ratios and other factors have exacerbated the valuation gap, hindering the flow of listings this year.

However, sponsor-backed assets will make up a “good portion” of 2025’s IPO pipeline, according to Briscoe.

Next year’s block trades will need to mirror the features of successful deals done this year: quality assets with good liquidity, wall-crossing investors and providing visibility on the full deal size.

“Investors will pass on deals they feel are too big and too tight,” Briscoe says. “There isn’t enough P and L around for investors to need to be there for everything. Investors are more open to missing deals than they have been in prior years.”

“There are always some exceptions where some sellers need to run auctions — or have only one more placing to do, so they need to maximise price,” Erpici says. But sellers that have multiple blocks to come are likely to opt for a “non-risk” solution to ensure the best quality book and aftermarket performance, he adds.

The year 2024 was a big one for the blocks market and, by and large, sales have worked. There have been occasions when dealers have been left long but there have been some notable deals.

These included a $1.6bn trade in LSEG by Blackstone and Thomson Reuters in May, Pfizer’s $3.25bn Haleon sale and German government sell-downs — such as KfW’s $2.55bn sale in Deutsche Telekom.

Repeat sellers of blocks chose not to push discounts too aggressively in 2024, ensuring that trades worked well in the aftermarket, allowing the next trade to come at a higher price.

The exception was the $1.28bn Geely sale of Volvo Trucks in April, some specialists thought. October’s $5bn primary block trade in DSV, on the other hand, was the darling of the year.

“DSV was just a phenomenal transaction that most of us would hope to do only maybe once or twice in a career,” Bernstorff says.

The other dynamic that is expected to continue in 2025 is the balancing of price and size. For assets that are not best in class, big deals at high valuations will be difficult to execute. Issuers will be better off doing a small deal.

“We are having many discussions where eventually there is an optimisation of price and size — in some situations, you cannot achieve both,” Erpici says.

Some sellers will start with a smaller size to maximise the price of their block trade; others will want to maximise size and give something up on price, he adds.