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Companies are increasingly seeking the backing of “cornerstone” investors before going public on US markets, bankers say, highlighting the difficulty of pulling off deals in a fragile market for stock listings.
A flurry of high-profile initial public offerings this year have involved cornerstone investors — who agree to their names being published in a company’s prospectus in return for getting a guaranteed allocation of shares.
Instacart, a grocery delivery service, disclosed in a filing on Friday that several investors, led by Norway’s sovereign wealth fund, planned to subscribe for $400mn of shares in a float that IPO expert Renaissance Capital estimates will raise $1bn. British chip designer Arm has been courting big-name customers including Amazon as potential anchor investors in its IPO later this month, which is expected to be the largest in New York this year.
Both deals are considered key to a successful reopening of the IPO market that has only briefly flared into life this year following a dismal 2022. Three further floats of high-growth companies seen as critical to the health of the wider market — Israeli cosmetics group Oddity Tech, restaurateur Cava, and thrift store operator Savers Value Village — also featured cornerstone investors.
Bankers predict a growing role for such backers in the coming months, as the sluggish market encourages more firms to secure the early backing of big-name investors before floating on public markets.
“When you have markets that are going through a tricky reopening period like now, when execution outcomes may be uncertain, then you are going to see more deals where companies have pre-sold shares to big names who love them,” said Eddie Molloy, co-head of Americas equity capital markets for Morgan Stanley. “It’s a form of de-risking.”
So far this year companies have raised $10.3bn in US IPOs, according to Dealogic. While that already eclipses 2022’s total of $8.6bn, it is only a shadow of the $154bn raised in the boom of 2021.
“We’ve increasingly been talking about that [cornerstones] as something we want to explore for any deal in next six to nine months,” said David Bauer, head of equity capital markets at KKR, the private equity firm. “It’s not a prerequisite, but I think any issuer would be looking for that kind of support and sponsorship.”
Cornerstone investments are a relatively recent arrival to US IPO markets, becoming a regular feature after the Securities and Exchange Commission eased so-called “testing the waters” provisions for all companies in 2019, allowing them to meet more freely with institutional investors around the filing of IPO registrations. Previously it had been reserved only for smaller groups, dubbed “emerging growth companies” under rules introduced in 2012.
The shift in US markets came after many companies had taken advantage of the boom in private capital to avoid going public until they had grown much larger, raising the stakes for underwriters tasked with filling IPO order books. More than a third of electric vehicle maker Rivian Automotive’s $14bn share sale two years ago went to cornerstone investors, as did nearly half of the $2.6bn sold by Brazilian banking group Nu Holdings the same year.
Such investments have long been common in Asian deals — most frequently in Hong Kong, where they earned a reputation for shoring up weak Chinese deals and weakening trading liquidity.
“Historically on a US IPO, investors met the company once on the roadshow and then submitted an order,” said Keith Canton, head of JPMorgan’s Americas equity capital markets team. “Now we have the dynamic where investors are meeting companies multiple times before an IPO — sometimes years before. They’ve seen companies perform in the private market and so they have a lot of conviction when it comes to the IPO.”
Oddity Tech’s $487mn float in July came with $100mn from investors including Baillie Gifford and Franklin Templeton, while Cava pre-sold a similar amount to Capital Group and T Rowe Price as part of its $365mn deal in June. Later than month Savers Value Village sold a third of its $400mn deal to Norway’s sovereign wealth fund and Healthcare of Ontario Pension Plan. All three companies are still trading above their IPO prices.
Morgan Stanley’s Molloy said the building of an IPO order book, including cornerstones, was a balancing act in the US market.
“While it helps build support and momentum for a deal, if too much goes to cornerstones, that can constrain new investors and a broader float. Also, relying too much on existing investors as cornerstones can send the market mixed signals,” he said. “But even in strong markets, cornerstone investors are here to stay given that ones with strong credentials at launch are a feather in your cap.”
Unlike the practice in Hong Kong, US investors face no lock up for their holdings, although they are assumed to be long-term investors.
Lawrence Burns, a portfolio manager at Baillie Gifford, said the fund manager only took cornerstone roles in companies it already knew well.
“Almost all the time it is only possible if you have some knowledge and relationship with the company,” he said. “If a company was going public and came to us when we’d never met them before and said ‘do you want the cornerstone?’ that would be quite difficult for us to get comfortable with — even for an IPO, let alone having to make a decision even quicker for a cornerstone.”
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