Continental European initial public offerings’ valuations are set to return to more attractive levels after a spate of pulled flotations, says Mark Denham.
- Pricey valuations and global growth fears have prompted a spate of initial public offerings (IPOs) to be pulled recently
- The surge in biotech and technology offerings is not a re-run of the ‘dot-com’ boom of the 1990s
- We hope bankers get the message that valuations need to be realistic and businesses financially sound
- The outlook for European shares and IPOs in 2016 is encouraging
- Discerning investors will look for those deals offering genuine long-term value and avoid more suspect ones
After a strong run of initial public offerings (IPOs) in continental Europe during the first half of the year, several were pulled in recent months as unrealistic company valuations and earnings expectations dampened demand. As more attractive investment opportunities start to emerge again and the prospect of further monetary policy easing boosts the appeal of shares in the region, IPOs will become more popular. Discerning investors will look for deals offering genuine long-term value and avoid more suspect ones.
Lull in activity
A slowing Chinese economy and fears over biotech share valuations have been among factors leading to more bearish sentiment since the summer. Indeed, UK-based Shield Therapeutics and German building materials group Xella were among a host of offerings pulled, especially in the healthcare sector, in this period.
Attractive long-term investment opportunities were far tougher to find in the third quarter as valuations were increasingly unrealistic and many loss-making businesses tried to list. For instance, French music-streaming business Deezer, a rival to Spotify, tried to float while not expecting to turn a profit until 2019.
Despite the recent lull in activity, IPO volumes remain relatively strong with €35.7 billion1 (£25.3 billion) raised from European flotations in the first nine months of 2015. Volumes were down only 11 per cent on the first nine months of 2014, a year when the value of deals was the highest since 20071.
We hope bankers will get the message that IPO valuations need to be realistic and only those businesses that are ready to float are brought to market. Sentiment has improved in recent weeks, with European shares recording their strongest monthly gains in October since July 2009 and euro-zone central bankers raising hopes of further policy easing. However, investors are keeping the pressure on issuers. For instance, the IPO of continental Europe’s largest asset manager, Amundi, is expected to price towards the bottom of the range given by the syndicate bankers when it floats later in November.
Upbeat earnings prospects
The third-quarter continental European earnings season has been mixed. However, earnings in the region look set to grow by between five per cent and seven per cent in 2015 and then accelerate to around ten in 2016 as economic output in the area expands modestly.
Continental European equities are likely to remain around current levels this year before appreciating in 2016, aided by stronger company profits and domestic monetary policy that is far more likely to be eased than tightened. The outlook is encouraging for European healthcare businesses, including biotechnology, despite their strong rally of recent years. These companies should continue to profit from an explosion in innovation, more efficient research and development and regulatory attempts to quicken drug approval procedures. As ‘animal spirits’ return, so the potential to add value to portfolios from well-priced IPOs is set to improve. We doubt this is a re-run of the ‘dot-com’ boom of the 1990s.
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