Caspar Callerström, Partner at EQT Partners and responsible Investment Advisor for Munksjö and Sanitec, shares his view on current market sentiment and the IPO opportunity.
In the past year, five EQT portfolio companies have successfully carried out IPOs. In 2013, Munksjö Oyj was listed on NASDAQ OMX Helsinki after the merger with Ahlstrom’s Label and Processing Division; at the end of the year Europe’s leading bathroom ceramics producer Sanitec was listed on NASDAQ OMX Stockholm and Japan Home Centre, Hong Kong’s leading housewares retail chain, was listed on the Hong Kong Stock Exchange. This year has seen the world's leading provider of integrated facility services, ISS, listed on NASDAQ OMX Copenhagen and most recently SSP, one of the largest food and beverage travel concession operators globally, successfully listed on the London Stock Exchange in July.
We have had a good period now for the past 18 months or so and the pent-up appetite investors had for new companies has been largely satisfied, I believe. On the other hand, the equity markets have strong inflows of capital now, and that money has to go somewhere. So I think the opportunity will be with us for a while longer but it will be more demanding to IPO. EQT still sees it as a good option and has a couple of portfolio companies that are in the final stages of evaluating a potential IPO.
I think EQT struck a good and responsible balance in the pricing and how much we allocated in the IPOs. Trying to chase the last dollar in an IPO is often counter-productive in the little longer run. It was also pleasing to see that a company like Sanitec, which has been through some tough times, was very well received. Investors understood that it was a problem with the balance sheet and not the company. In US IPOs the initial free float is often smaller, allowing for a more flexible initial pricing and then leaving it to the market to find the equilibrium and we see more of that in Europe now. It is a development I think will benefit the IPO market.
There are a number of uncertainties surrounding global markets. In Europe, prices have already discounted an economic recovery and if that does not materialize there is an obvious risk for a set-back. Then there are the Ukraine and Gaza situations and the Argentine default which may not impact prices directly but add to volatility and uncertainty, something which in turn make IPOs a bit harder to do.
There were simply some good opportunities to sell some shares to institutions but the quarterly reports and the lock-up expiration didn’t match very well timing-wise and EQT preferred to sell just after a report when everyone has the same information. Therefore the best action was to seek a waiver from the lock-up contract. That is not very unusual but I think the attention it received is because it has been some time since we have had a good IPO period and even institutions tend to forget.
Lock-up contracts have become very standardized and they are probably here to stay. One improvement could perhaps be to look at a certain number of quarterly reports rather than a set time period. In some cases, such as when you have a founding entrepreneur as the major owner they also do serve an important purpose.