Investors stay in the ECM hunt

Markets jolted in June 2013 when US Federal Reserve chairman Ben Bernanke set out plans to taper quantitative easing from late 2013 onward. In the previous few years, any signs of a sustained revival in equity capital markets (ECM) at the start of the year were snuffed out by shocks – mostly eurozone related – by mid-year.

But this time around, markets proved more resilient. The initial public offering (IPO) of German real estate company Deutsche Annington, postponed after Mr Bernanke’s comments, went ahead just weeks later, raising more than €600m. Investors have responded positively to further guidance from the Fed, making it clear that any interest rate hikes will follow only a long distance behind the tapering process.

No surprises

“The absolute fall in markets after the Fed comments was significant, but the impact was short-lived. The market has put that behind it quickly, clawing back the losses and surveys suggest 70% to 80% of investors are now expecting tapering to begin in September or October this year, so that should not cause a fresh negative surprise,” says Ken Robins, head of Europe ECM at Citi.

ECM bankers are generally more optimistic than they have been for some years, with private equity exits via the IPO market beginning to take off once more. In addition to Terra Firma-owned Deutsche Annington, German forklift manufacturer Kion (owned by KKR and Goldman Sachs) staged a €900m IPO in June, CVC-owned Belgian Post raised more than €800m, and UK insurer Partnership (owned by Cinven) raised £485m (€564m). Alasdair Warren, head of European ECM at Goldman Sachs, says private equity sponsors are now more confident that IPOs can deliver the kind of execution certainty that they want.

And there was even a sighting of a particularly rare creature in July – an equity offering to fund growth merger and acquisition (M&A) activity. Telefonica Deutschland, one of the success stories of 2012 with its €1.45bn IPO, proposed a rights issue of €3.7bn (with €2.84bn to be bought by its Spanish parent) to fund the acquisition of telecoms firm E-Plus, KPN’s German subsidiary.

“It is too soon yet to call the start of a new trend, but M&A financing is certainly the one element that had been missing from the revival of equity capital markets,” says Martin Thorneycroft, head of European equity syndicate at Morgan Stanley.

Broad investor base

A level of investor engagement not seen for some years is enabling this broad range of issuance. Bankers say there was a pause in US investor appetite for European issuers in the second quarter after a strong start, but the signs are that they will be present after their summer break. Mr Thorneycroft says US buyers have participated selectively in the opportunistic accelerated bookbuilds, will “play sensibly in size” in IPOs and are even willing to look at peripheral Europe.

Most offerings have performed well in the secondary market, which is important given a growing pipeline of larger deals for the rest of 2013. IPO volumes may be significantly higher in the second half, partly driven by government sell downs, of which one of the most high-profile deals is likely to be the UK’s Royal Mail. Inflows into equity funds, share buybacks and M&A activity have all contributed to an imbalance of investor demand relative to the available supply, especially in Europe, according to Mr Warren. “The precise make up of demand changes on each deal, but it is broad-based, and goes well beyond US and UK long-only investors,” he says.

Emerging market pause

One area where investor demand has been more profoundly affected by the prospects for tapering quantitative easing is emerging market equity. Multiples were in any case higher than in developed markets on expectations of better growth and investors appear to feel that emerging markets in general offer less valuation upside.

“Flows into emerging market funds have been neutral or negative and fundamentally the pause makes sense. There is more governance uncertainty in emerging markets and earnings prospects in the US are now similar. The challenge for now will be to sell emerging market equity at valuations that are attractive to the vendors,” says Mr Robins.

In addition to the opportunistic market for government and private equity sell downs, one theme that was significant in 2012 shows signs of returning. The recent focus by regulators in the US and western Europe on the simple leverage ratio instead of risk-weighted assets looks set to drive a fresh round of capital-raising, following the £5.8bn Barclays rights issue in August.