European equity capital markets are active again following a pedestrian few months with investors from both sides of the Atlantic piling in to block trades.

A mega CHF 1.9bn (USD 2.2bn) sell-down in Zurich-listed skincare company Galderma at the end of May was followed by financial sponsor block trades in Polish retailer Allegro and French optical technology firm Exosens.

The USD 1.76bn equivalent of block trade paper which was priced in the first six days of June has already surpassed the USD 1.4bn issued in the entire of April.

Source: Dealogic 

Sell-downs in Galderma and Allegro had to be upsized to satisfy heavy investor demand.

Appetite for European equities is stronger than it has been for many years, with indications global portfolio managers are looking for diversification in European stocks via block trades after years of overweight allocations to US large cap equities.

According to Dealogic Institutional Data, US-based investment giants like TIAA-CREF, Neuberger Berman and American Century are now among the US investors listed as major shareholders in several regular sell-down names in the European blocks market.

Two ECM bankers noted that all three investors had started to be more active in European equity capital markets.

“These are names that were regular investors in European ECM up to about 2016 and then we saw them drop away,” said one of the bankers.

“But we have seen in recent months we can start to rely on these names a lot more, especially in block trades. It seems to be a bit of history repeating itself over 10-year cycles.”

Neuberger Berman declined to comment on its European investment strategy or whether it was investing in European stocks through blocks.

TIAA-CREF and American Century did not respond to requests for comment.

New York-based First Eagle Investments is another investor which has positions in equities where there has been regular block trade activity, according to Dealogic holdings data.

First Eagle appears as a major shareholder in both Galderma and Haleon. It was an active buyer of Galderma’s shares around the time of a March block trade, according to holdings data.

A media representative for First Eagle declined to comment on its European block trade investments and strategy.

After years of under-allocation to European equities, there are indications some international investors are using block trades to rebuild their exposure more quickly than would be possible via on-market purchases.

This, the bankers say, is a key reason why listed-sell downs through accelerated bookbuilds (ABBs) are proving so attractive to global and US investors.

“We are seeing greater participation from US long-only and sector specialists coming back into European ECM and to chase the embedded upside and size present in the ABB product at the moment,” said the second banker.

“Many have done extremely well in these deals so far this year. The quantum of US investors wanting to meet with European deal teams has increased exponentially.”

Investors diversifying into Europe

Global equity market flows indicate investors are seeking geographic diversification away from substantial overweight positions in the US built up over a long period of outperformance.

Data from Bank of America, via data provider EPFR, shows investor outflows from US equity funds over the past three weeks totalling around USD 7.5bn, driven primarily by assets being pulled from US large-cap funds.

European equity funds had inflows worth USD 2.6bn over the past eight weeks.

Benchmark index performance also shows there has been a preference for European over US equities year-to-date.

The S&P 500 is up around 2% year-to-date and the NASDAQ 100 is up around 4% while Europe’s Stoxx 600 is up 8%.

“International investments, including those in Europe, are a growing focus for a lot of firms,” said a US-based money manager. “There is a lot of upside outside the US.”

“European equities are trading at a discount relative to their US counterparts

“The valuation gap between US and European markets is historically large.”

Several industrial categories, notably aerospace and defence, were of interest, the money manager said.

European nations are boosting government spending in the defence sector in response to US calls for the region to foot more of the bill for military spending.

Financial sponsor Groupe HLD was a beneficiary of that theme last week, helping it complete the sale of a 5% stake in Exosens worth EUR 115m following recent share price gains.

Exosens’s optical technology products are sold in part to customers in the defence sector.

This news service has also noted previously that PE firm Triton is still sitting on a large stake in German defence drive solutions business Renk, listed in 2024, where there could be strong investor appetite if a block trade were to be launched.

The financial services sector is also looking interesting, according to the US-based money manager.

Several pre-IPO businesses in the UK look attractive, particularly Revolut and Monzo, the money manager said.

Both Revolut and Monzo are possibly considering a London listing, this news service has previously reported.

Most US investment in European equity capital markets transactions has been through block trades this year but there is hope there will be a follow-through into IPOs once larger deals start hitting European exchanges, three bankers said.

“We are still heavily invested in the US but we are diversifying more this year,” the US money manager added.