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From the ashes: How to bring back European IPOs in 2023?

Equity capital markets have opened up again as 2022 comes to a close, and an uptick in accelerated trades has led dealmakers to once again dust off their pipeline of IPO candidates ahead of a the new year.

Some of the names will be familiar to buysiders, many featured in the 2022 to-do lists until rising rates and a declining global economy, fuelled by conflict in the Ukraine, shut Europe’s IPO window.

They include mega listings such as Plenitude, ENI [BIT:ENI]’s retail gas and renewable energy unit, ABB [SWX:ABB]’s EV charging solutions business, Swiss skincare manufacturer Galderma owned by EQT [STO:EQT], Coca-Cola Beverages Africa and Nucera the hydrogen-unit of Thyssenkrupp [ETR:TKA].

They may also be joined by Ampere, the electric vehicles unit of Renault SA, which mandated banks for a 2023 listing last week, although the deal is slated for the end next year.

Two bankers speaking to the ECM Pulse this week said they were hopeful of one or two transactions being possible in the first quarter of next year. Companies which play into the theme of renewable power generation or electric vehicle technology could be successful given investor appetites for names in the sector, they said.

“There is a risk on sentiment” towards renewable energy, said one, adding that issuers need to reset expectations to get deals done.

“We had big names where investors told us they were in, but the seller decided not to go ahead, not because they wanted a specific number, but because they wanted a more positive market environment than what we had this year,” the banker added. “For these sellers, there is a choice to go, it is just whether they push the button in January or March.”

A second banker was also hopeful that deals in the 2022 pipe, which have been largely pre-sounded among investors, will be easier to resurrect should market optimism hold into 2023 given the assets are well known extensive pilot fishing this year.

He also confirmed that IPO issuers with strong ESG fundamentals, particularly in renewable energy or clean energy technology, would be favoured by investors.

Equity capital markets have had a good month, with a busy November following positive US inflation data. Several large block trades and equity-linked deals priced alongside some rights issue launches, with investors showing broad support for a wide range of transactions. However, investors are asking for big discounts on trades in large, listed companies and are likely to be even more discerning on illiquid and untested IPOs.

Given many issuers pulled back from the IPO market this year because of disappointing valuation feedback, they are unlikely to be persuaded to jump in in 2023 unless they have substantially altered their valuation hopes for their companies.

Waiting on the Fed

A third ECM banker was more pessimistic about the general environment for IPOs next year, predicting little activity before the third quarter of 2023.

The first banker was also circumspect about a full issuance window of new deals until at least after Easter, despite the possibility of one-off deals in the right sector.

Both bankers added that until there is some greater clarity over the direction of US and European interest rates. the new listings market in Europe would remain spotty at best.

“We are still in an environment where the market wants to see how the rate cycle and inflation plays out before moving ahead on IPOs,” added the first banker.

The third banker added that he hoped that US interest rates would not rise as high as many feared and said the market was broadly of the same view.

CME Group’s Fed Watch tool, a barometer for market participants to gauge expectation of potential changes to the fed funds target rate, shows a 36.4% probability of the target rate being between 500bps to 525bps at the July 26 Fed meeting next year. There is a 30.7% probability of 475bps to 500bps and a 18.4% probability of a target fed funds rate of 525bps to 550bps, the next two most likely levels according to the tool.

This could of course change with new data, particularly if US inflation shows signs of acceleration again which could keep Europe’s IPO market shut for longer.

However, even if conditions are not right for an IPO wave, one thing the blockbuster EUR 9bn listing of Porsche [ETR:P911] proved in September, is that new listings are possible in a bad market.

“Porsche proved a deal can get done if an issuer is happy to accept the price the market gives them,” said the first banker. “A quality business with strong underlying financial characteristics has a very good chance of being successful even in this market.”