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New issues, old issues

8 Aug 2014 By Dominic Elliott

BlackRock is right: European initial public offerings need more work. The world’s largest asset manager recently emailed bookrunners asking why a third of new listings in Europe this year were trading down and how matters could be improved. The IPO market is much healthier than when BlackRock railed against UK listings in 2011. But there are still too many banks per deal and buyers are still rushed into decisions.

When BlackRock spoke out three years ago, banks, independent advisers, investors and buyout firms were engaged in a furious slanging match and deals were almost non-existent. Investment banks have since addressed three of BlackRock’s gripes. Investors now tend to meet companies earlier, meaning they get to know businesses better. The rise of independent advisers has clamped down on fees, albeit at the cost of punchier deal pricing. And scandals like Bumi and Essar Energy mean governance gets better scrutiny. Gearing is generally modest too – an old buyside bugbear.

Overall performance is not terrible. Pricing a company is an inexact art, so any IPO boom is bound to contain a few duds. And investors share some blame: they fed the hype around AO World and Just Eat, for example. But there are still signs of greed and incompetence. Some deals simply look overpriced with hindsight. A few have tanked, missing targets within weeks or months of floating. The worst – eDreams Odigeo – is off 65 percent.

So things could usefully improve. To take one example, investors still sometimes get final deal documents just minutes before a new issue is live. That’s unacceptable: buyers really need at least a day or two to crunch the numbers properly.

And bank syndicates are swelling. Ten deals this year have had five or more banks notionally in charge, a very rare sight before the crisis. That diffuses responsibility and can make it harder to interpret market demand accurately. It also limits the number of independent voices who can assess the deal without any conflict of interest. BlackRock and their ilk need to keep pushing back.


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