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Flight to quality: despite bonfire of IPOs, institutional investors happy to play ECM in hot names like Zealand Pharma – ECM Pulse

A tempestuous parliamentary election in France has weighed heavily on European stocks and has smashed the hopes of some Europe’s IPO hopefuls. But capital markets are far from shut with long-only institutional investors continuing to use ECM to build exposure in big names in sectors they like before breaking for summer.

On Friday, Spanish baker Europastry, became the third European IPO to be postponed by an issuer blaming market volatility. The deal is the third casualty since French president Emmanuel Macron shocked markets with a snap parliamentary election following disastrous EU parliamentary elections.

Italian luxury shoemaker Golden Goose was the highest profile cancellation followed by Spanish retailer Tendam, which also reportedly decided to not go ahead with an IPO pre-summer.

However, while IPOs, the most exposed product in the equity capital markets suite to prolonged periods of volatility, have been shelved until after the summer, investors haven’t put pens down quite yet. Instead, they are cycling into more liquid equity with lower longevity risk than a big IPO investment.

Gorging on blocks

A growing theme in Europe’s equity capital market this year has been large institutional investors taking a far greater role in block trades, traditionally the domain of hedge funds.

They are also proactively shaping deals through reverse enquiries into banking desks, giving sizeable order indications on names they like to bankers, who then take this feedback to a client and effectively create a trade.

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Source: Dealogic

Such was the case last week, with a USD 1bn equivalent primary raise in Zealand Pharma [CPH:ZEAL],

Healthcare is a well-liked industry class for equity investors in Europe given the rise of weight-loss drug Ozempic, the popularity of which has generated significant interest in anti-obesity drugs, propelling its maker Novo Nordisk [CPH:NOVO-B] to become Europe’s most valuable listed company earlier this year.

Zealand also makes weight-loss drugs and has seen its share rise by almost 130% YTD, as of market close on Monday, June 24, the last day before the block. The shares were given extra impetus on 21 June after positive trial results.

“It is a real theme this year,” said one of the deal sources. “Longs are reversing on sectors they really like and effectively creating block trades. Long-only proactiveness in the accelerated market is a real theme for this year.”

The source, plus another close to the situation, noted that the deal was heavily allocated to global long-only investors.

One of the largest investors in the stock, according to Dealogic data, is Fidelity Management & Research Co which picked up just over 1.4m shares in the company in the first quarter, concurrent with a 3.76m share sell down in January.

US fund JOHCM International Select Fund also entered the register in 1Q picking up just under 1.6m shares.

Specialist US health funds also received heavy allocation in the book, the two deal sources said. While the investors in the trade last week have not reported on their holdings yet, several US specialist funds bought big chunks of stock in 1Q.

Dealogic data shows Fidelity Select Biotechnology Portfolio as a major shareholder in Zealand with a shareholding of 827,330 as of February 2024, picking up 166,228 shares between reporting periods; BlackRock Health Sciences Trust II was also shown to have picked up a large chunk of stock as of March 31, 2024.

“A big part of the pitch to the specialist accounts is that this could be the next Novo Nordisk,” said the first source.

Zealand’s book had around 130 lines and many investors got no shares at all.

The sources noted it was a concentrated allocation, with the top ten taking 70% and top 20 around 80% of the deal, with a mix of existing and new accounts taking stock.

Zealand Pharma did not respond to requests for comment on the trade.

The Zealand trade was also the third significant primary equity raise in June, following on from rights issues from National Grid [LON:NG] and France’s Alstom [EPA:ALO].

An ECM banker noted the wave of primary deals have been “well received in the market” adding that investor nervousness around new share raises is starting to evaporate.

“You need a good use of funds and proper returns to get these deals across the line. Now that risk appetite and the market has improved, I expect to see more primary issuances,” he noted.

Big investors far from shut

Long-only institutional investors have also been big participants in the privatisation of AIB Group [DUB:A5G], which was also in the market last week.

While trades in AIB are not proactively instigated by long-onlies, given the sell-downs are part of a longer strategic initiative by the Irish government, they have used a series of sell-downs by the government to steadily build exposure in the name.

A source close to the AIB block, which was sized at EUR 634.39m (USD 592.9m), said that it attracted over 100 lines with big institutional investment and some sovereign wealth funds taking large slices of stock.

Dealogic data shows a host of large institutional investors and sovereign wealth funds as large existing investors in AIB, which the source noted had built up a following among a number of its shareholders.

Both healthcare, and financial institutions, have been two of the top performing equity segments in European public markets and long-onlies will increasingly use blocks to gain far larger chunks of stock in favourable industries to invest in far greater side than would normally be possible in normal trading.

One long-only investor added their firm had been more active in blocks than they had been in several years and would continue to use reverse inquiries to try and unlock sizeable liquidity events in sectors or specific names they liked.

“Equity capital markets are far from shut,” the source close to the AIB deal said, referring to headlines around Europe’s stuttering IPO market. “We are having lots of conversations with sponsors and other sellers who don’t believe it with the headlines, but if you have an asset in a well-liked sector the big investors are there for you.