Keep calm and carry on originating

6 min read

I chaired IFR’s annual ECM conference on Tuesday and what a time we all had.

I’ve been hosting this event for six years now but this year’s ended up being the most perfectly timed of all.

I say perfect not, of course, insofar as deal activity and sentiment are concerned, but because a host of new talking points emerged for the senior bankers who spoke on our panels. The market tone has become so threatening in the past couple of weeks, and the blistering pace of activity that had given rise to such positive sentiment has dramatically given way to a growing list of deal casualties. Our guests – who, by the way, between them have executed 40% of all EMEA ECM so far this year – paused for thought and tried to make sense of it all.

So from my admittedly rather selfish viewpoint of wanting a bit of capital markets theatre up on the stage, I was pretty content. We discussed the current market malaise and tried to figure out how long the market volatility and curtailment of deal activity would last – i.e. is it a blip or does it indicate longer-lasting problems? How might it impact deal-making, particularly the dark art of valuation and pricing? We also talked about the tortuous European IPO process that is so elongated that it can put price ranges off-side and quite literally kill deals stone dead right in the middle, during periods of volatility.

And I travelled the by-now well trodden path of asking ECM bankers the question they all groan about: how can ECM bankers work more constructively with independent IPO advisers? (The public answer to this is always positive – it has to be – but you just know that’s not what they’re really thinking. But I had to ask anyway; it’s a game we all play.)

Numbers speak volumes

If you take a look at the bald numbers, ECM has had a barnstorming year, with global proceeds up 29% year-on-year at US$719bn. IPOs have done even better: the number of deals rising over 50% and proceeds 71% higher at US$192bn. Europe has been the stand-out outperformer in the global IPO stakes with the number of deals doubling and proceeds tripling.

But if you’d run IFR’s European ECM Daily Briefing through a news algorithm for sentiment signals over the past two weeks, you’d have shut up shop and run for the hills. The language has turned distinctly negative with all the talk of deals crashing and burning, failing, pricing at the bottoms of ranges or below the ranges, performing badly or in some cases tanking in the aftermarket.

And of course there are the cancellations: BCA Marketplace, Aldermore Bank, Molecular Partners, Intercos, Spie, Italiaonline etc, and the likes of Virgin Money and Tele Columbus on hold, with others pausing between pre-marketing and bookbuilding. And those, of course, are deals that were in the market where underwriters had pressed the start button.

Much of what was in the Q4 pipeline won’t hit the launch pad this year. That means a ton of lost or delayed fees for banks just when they’re getting near to year-end and ahead of pay and bonus discussions (albeit the latter have much less resonance now given the bonus caps). On the plus side, it means the IPO pipeline for 2015 is looking very robust. And it’s clear that even while the market volatility plays itself out, new deal prospecting continues.

Deal originators and syndicate professionals have to be positive about deal-flow; it’s their lifeblood. As a result they can brush off or try to nay-say negative signals in the hope they go away. But I sensed no complacency or delusional thinking on show on Tuesday.

Market jitters will always slow or close primary markets. The stigma around pulling deals, changing price ranges, holding off or printing at the bottoms of or below ranges to get deals over the line in bad markets is a bit overdone in my view and unnecessary. The best judgement and advice can only ever be as good as the underlying markets allow them to be.

At the end of the day, clients want deals where they can maximise price; bankers want deals that give issuers the sense they’ve achieved as much of that as is reasonable to expect at the same time as leaving something on the table for investors. An environment where just getting deals done at the bottom, and having them trade thinly and insipidly, is not what this is about. Delaying is clearly the best response.

There was some chat at the conference around what one banker referred to aspirational pricing in deals done year-to-date. That’s clearly off the table now. If, when the market returns, pricing is more cautious and realistic, that’s probably a good place to start to build the momentum back up again and get investors back into the flow.

European equity inflows have been positive for some time. The pullback in the past couple of weeks is a natural reaction to the market tension, but the fundamental picture that gave rise to those inflows in the first place – including rock-bottom bond yields – is unlikely to have been derailed.

If deals get pushed back into the Q1 2015 calendar or beyond, I say to ECM bankers: relax, put your feet up, spend more time with the family and recharge the batteries for what could be a busy period early next year. On a momentum play, it’s all looking fine. And this year’s malaise will soon be last year’s statistics.

Keith Mullin