“Squeaky bum time” was a famous term coined by legendary Manchester United [NYSE:MANU] manager Sir Alex Ferguson to describe the final weeks of a Premier League season. The stakes at the end of a season where every success or failure matters so much more plays just the same for equity investors at the end of the year.

With only a few weeks before 2023 ends, investors are lining up for the last couple of weeks of open markets given rocketing equity indices. Every trade brings the opportunity to bank enough profit to make the difference against benchmarks closing in on recent highs.

In the case of secondary blocks, investors appear willing to pay up for stock exposure to try and generate end-of-year performance.

Dealogic’s Price of Liquidity (PoL) ratio, a metric assessing the attractiveness of block trades, shows the average PoL ratio for European secondary blocks sitting at around -0.66x the size of stakes sold, the lowest ever since the beginning of 2023 when the ratio was created.

This translates to some of the most seller-friendly conditions in the blocks market since the start of 2022.

Froth vs. Fundamental demand

Some of this demand might be a case of FOMO rather than fundamentals, an ECM investor and an ECM banker agreed.

“Some hedge funds have been missing out, particularly on Middle Eastern IPOs, and then some of the better primary deals have mostly gone to dedicated shareholders,” said the banker. “Hedge Funds want to be allocated on those deals and, when they aren’t, they instead put in big orders on what they think they can get.”

This dynamic, according to the banker and the investor, is likely leading to hedge funds being over-allocated stock in secondary block trades and then selling immediately the next day, which then impacts the trade’s performance. Secondary block trades in Banca Monte dei Paschi di Siena [BIT:BMPS], TeamViewer [ETR:TMV] and Volvo [STO:VOLCAR-B] all traded down the morning after the deal, although BMPS has now recovered to above issue price.

“I think this is a real issue for the banks,” added the investor. “It is getting really hard to decipher between those jumping in and then selling on day one and those who are genuinely interested in the stock.”

Investors with a dedicated ECM mandate have an obligation to look at most deals, said the first banker, adding that many are concerned someone might push out a bad deal, perhaps on a risk auction, that is too large at too tight a price.

“Even in something like a USD 500m deal where you get a USD 10m allocation, that isn’t a loss you want on your books in late November, December,” he added.

“While the sentiment overall continues to be pretty positive,” said a second ECM banker. “Eyebrows have been raised on some of the big deals, a few which were unexpected. In most cases, people felt the discount was fair but deals haven’t traded as well".

“If you tighten price and increase size of the trade and it doesn’t work, you are always going to get more caution towards year end, the bar is getting higher.”

The investor confirmed his shop would be looking at deals for at least another fortnight but added that caution was creeping in. “Price and size are now key for us alongside stock liquidity,” he added.

An early primary present

Alongside opportunities for vendors to dispose of equity in the secondary blocks market, a pick-up in primary equity raising is expected to continue.

Last week, semiconductor firm ams OSRAM launched a CHF 775m rights issue following on from a strong October for capital raises. A flood of convertible bonds last week shows that there is an appetite among corporates for equity finance given the wave of pandemic-era debt maturities rolling off in the next two to three years.

Both bankers expect the theme to continue into next year, with several clients eager to fix debt burdens with an injection of equity. There are discussions underway with clients to move equity raising activity to before the end of the year if possible to execute in the accelerated market.

“There are all sorts of geopolitical worries still out there and inflation could become a problem again,” said the second banker. “There is an endless spectrum of things which can go wrong and, if you have the market there, do something when you have the chance.”

The investor, in line with others speaking to ECM Pulse in recent months, confirmed that he was keeping an eye on primary capital in the next couple of weeks, pointing out German sensor company Hensodlt [ETR:HAG] as one name he was keen on.

Hensoldt announced it was prepping an equity capital raise to help finance the potential acquisition of ESG Elektroniksystem- und Logistik-GmbH.

The end of the year offers a chance to make investors into champions if they get a good allocation on the right deal. But with the final whistle approaching, the consequences of getting it wrong could ruin the end-of-year league table.

Keep an eye on Dealogic’s lock-up report for information on potential upcoming deals.

Interested in ECM? ION Analytics has more

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