Europe’s IPO market is back rolling again, led by Swiss classified’s business SMG Swiss Marketplace Group, which launched its listing effort last week and The Beauty Tech Group, which kicked off a London debut effort today (8 September).

However, the barrier to entry for any IPO candidate remains high, and some – like the sponsor sellers of German pharmaceutical business Stada – may choose other routes for their business.

Stada was always going to be a tough IPO ask, according to investors who have looked at the deal throughout the year. While most buysiders didn’t question the quality of the company’s offering, they felt large levels of debt would have necessitated a significant primary raise at IPO that could have been difficult for the market to digest.

“It’s always a problem to not have that flexibility on deal size and the valuation, you need flexibility to tailor a deal to the market,” said one.

Stada could certainly have gone public, with sources close to the deal adamant throughout the year that demand was there and that the asset was of the calibre required to clear the hurdle to public markets.

But its sellers, Cinven and Bain Capital, would likely have had to take a hefty discount at IPO to get the deal across the line and set fair for decent aftermarket trading.

And a large primary size would have necessitated a minimal sale of secondary shares so as not to overburden the market, delaying any monetisation and increasing the overhang.

Not to say that the blocks market isn’t accommodative. Staging a sell-down can be handled effectively.

Just ask EQT, which has continued to sell chunks of Swiss skincare business Galderma at ever higher valuations, after listing the business last year in a mostly primary deal.

But if the stock fell post-IPO – alas, hardly a rarity for Europe’s equity capital markets tentpole transaction – the sponsors would have been left sitting on huge piles of an illiquid, limping, stock.

Which makes a straight sale so appealing.

“It’s a great result for the sponsors,” said a second ECM investor. “Stada would have been a big deal and not that large a valuation, given where investors wanted to buy it.

“To get EUR 10bn for it is fantastic, it would have really struggled to get that in the IPO market.”

With Stada done and dusted, SMG will be the first sizeable test of European IPO appetite.

The group is a “good asset” for the IPO market, the first investor said, while cautioning sellers Mobiliar, Ringier, and General Atlantic against listening to any hype growing around the listing and pricing it too expensively.

High barrier

Bain and Cinven’s decision to sell Stada, rather than listing it, is emblematic of a European IPO market that is not quite as easy as record global stock indices suggest it should be.

This news service also reported today that the Dutch government might be pivoting towards a sale of the German utilities business TenneT TSO to a consortium of private bidders rather than listing the asset, due partly to market volatility and wider valuation debates in a testier market.

Investors are optimistic about a strong IPO market in the next few weeks, but there are some nerves about stock market bullishness that appears to be masking wider fears over the direction of the global economy and even the possibility of recession.

Two days of big equity market falls – on Friday 29 August and Tuesday 2 September, after the Labor Day holiday – followed several volatile trading sessions at the end of August.

Last week’s mini-market tantrum followed a spike in global sovereign debt yields, with investors concerned over the financial strength of the US and several large European sovereign borrowers.

Stocks fell in reaction and while the worry was short-lived it served as a warning that there are still fears over the longer-term direction of the global economy.

The first investor noted that brief bouts of volatility represented the reality that many equity investors don’t have strong faith in the recent market bull run.

“These market moves mean it’s really important from our perspective that any new issues are really high-quality assets at sensible valuations,” the investor added.

The second investor concurred.

“The barrier to entry for IPOs is still very high, especially for sponsor-owned assets where there is a need to take money out,” the investor noted.

Investors are open to buying into the debuts of large-listed businesses. But volatility hasn’t gone away despite apparent market strength.

This won’t mean deals can’t get done, but pricing will be key – and for some issuers preferring to transact quickly at the maximum price, a sale might seem preferable to cashing in on uncapped future stock growth through gradual sell-downs.

“This is all about sponsor preference and whether they just want to cash in now and sell in one go,” added an ECM banker.

Repeats of late August and early September volatility spikes are certainly possible in the months ahead, with markets at record highs. Stock fluctuations in the months ahead are likely to keep dual-tracks alive, with issuers exploring maximum optionality.