It’s not just London: the struggle to reanimate Europe’s IPO market

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Craig Coben is a former global head of equity capital markets at Bank of America and now a managing director at Seda Experts.

In the early 19th century the Italian physicist Giovanni Aldini gained public acclaim by trying to revive human and animal corpses through electro-stimulation. With a battery, he would induce convulsions that gave the impression of a reanimated, living being. Resurrection never happened, of course, but that didn’t stop audiences from flocking to Aldini’s demonstrations.

The spirit of Aldini lives on in the European equity capital markets. A lifeless IPO market is periodically revived, only for the unsettling realisation that — except for world-class companies with scale and profile — it’s still largely kaput. Aldini is no Houdini.

Earlier this month, the software firm Planisware launched what was shaping up to be France’s largest IPO in two years.  “Planisware resurrects moribund French IPO market,” headlined the trade magazine Global Capital. 

The planned €300mn offering boasted a cornerstone order from a unit of French state-backed CDC. Market feedback was apparently positive on both the company and the proposed valuation. The underwriters told the market early on that the book was covered! 

Unfortunately, while the IPO twitched and spasmed, it could never quite come to life. 

The withdrawal of the Planisware float comes on the heels of last week’s postponement of the €350mn Frankfurt IPO of military tank gearbox maker Renk Group. Again, the company impressed investors, and the proposed valuation stood at a discount to its peers. Again, the underwriters announced the offering was oversubscribed. But investors know to treat these messages with suspicion, and there wasn’t enough real demand for the offered shares to be responsibly allocated.

Adding New World insult to Old World injury, the German sandal maker Birkenstock priced its $1.5bn IPO in New York on Tuesday at a lofty multiple. It traded poorly on its first day, but at least it got done.

The paucity of IPOs in London has unleashed a wave of self-flagellation in the City that even Benedictine monks in the Middle Ages might have found overly masochistic. It has triggered reports, recommendations and reforms; they may take time to have an effect but it at least shows a sense of urgency, if not panic.

Two pulled Eurozone flotations within a week show that the UK is not alone. Global bourses have been parched by a two-year IPO drought, and European exchanges have looked especially dehydrated. Volumes have collapsed to a 13-year low. Even when deals stagger across the finish line, the after-market performance has mostly ranged from disappointing to poor. 

Indeed, Continental stock exchanges suffer some of the same problems as London, including poor liquidity, subscale domestic investor pools, and the virtual absence of retail investors. The IPO of a best-in-breed asset such as German firm  Schott Pharma can command a global audience but generally, investors are shying away from solid European midcap floats, even if keenly priced.

It wasn’t supposed to be like this. Starting in the 1990s Western European governments kick-started their sleepy stock exchanges by floating their trophy assets in banking, energy, transportation, telecoms and other sectors. And the introduction of the euro in 1999 turbocharged global investor interest in these crown jewels. Domestic institutions customarily put in large orders in these IPOs while retail investors piled in, too, enticed by discounts and bonus shares. If the UK had its everyman “Sid” to support the 1980s privatisations, the rest of Europe had the swashbuckling El Cid a decade later.

Unfortunately, the Europeans are learning what the UK has learned: that jumbo privatisations may get the ball rolling but reforms — in pensions, tax and regulation — are required to sustain the momentum and develop an equity culture. Solvency II also discourages insurers from holding stocks. And with its hodgepodge of stock exchanges and nation-based pools of pension and insurance capital, Europe isn’t close to an integrated capital markets union. It is fragmented and disjointed.

The salience of Brexit as a politico-economic phenomenon has arguably obscured the fact that notwithstanding the many differences in market structure between the UK and the Continent, they have many challenges in common. 

The decreasing relevance of their respective stock markets has broadly similar causes, such as lack of scale, liquidity spread too thinly, and insufficient pools of capital for equities. The UK and other European countries need to arrest the decline or watch equity capital-raising migrate to the US — and with it, a whole ecosystem of service providers and expertise with their jobs and capital. 

In 1094 El Cid prevailed in the epic Battle of Valencia by joining together Christian and Muslim soldiers. Ideally, the UK and EU would similarly unite for a common cause to mount their own challenge to the Americans. I’m just spitballing here, but one idea might be to form a union of sorts.