Curb your enthusiasm

Craig Coben is a former investment banker at Bank of America, where he served most recently as co-head of global capital markets for the Asia-Pacific region.

Nothing in investment banking is as exciting as an IPO. It is more than just another work project. It is a hero’s journey in which a company and its bankers venture forth into the capital markets, face daunting and unexpected challenges, and (hopefully) emerge victorious with a stock market listing, blue-chip shareholder register and good after-market trading.

An IPO starts with a “kick-off” meeting, a vice-free Woodstock-like gathering where a dazzling kaleidoscope of bankers, lawyers and company personnel comes together from all over the world to drink unadulterated Kool-Aid, only for a Big 4 auditor to kill the buzz by saying why the offering timetable is impossible to meet.

You have the pageantry of the investor roadshow, where management imagines having time to shop in Paris but ends up pleading for directions to the nearest toilet in a day filled with back-to-back presentations. (Zoom roadshows may spare more than a few blushes in future.)

Then comes the stock market ceremony where the shares start trading, with a ringing of the bell to golf-tournament applause. The event has velvet ropes, a red carpet and even photographers, like a Hollywood premiere albeit shorn of beauty and Botox.

Finally, there’s the closing party, where the senior bankers pay homage to the company and Lucite deal toys are handed out like a “goodies bag” at the Oscars. Meanwhile, the media cover an IPO intensively, injecting drama at every stage and asking everyone involved to tell them how rich the owners and company management will be after the IPO. It may sound tedious, but it is actually a lot of fun. Stressful, but fun. Along with big-ticket M&A, IPO execution is the Deion Sanders of investment banking — pure “Prime Time”.

That’s why the collapse in IPO volumes this year has been so painful for investment bankers, beyond the huge loss in underwriting revenue.

2022 has been an unmitigated annus horribilis for the IPO market, with global volumes falling 68 per cent versus the year before. In the US — by far the most active capital market — only 15 IPOs over $50mn have priced in the first eights months this year, versus 221 in the same period in 2021, amid the longest “drought” of technology IPOs in 20 years.

Activity has ground to a virtual halt in Europe, while most of the Asia-Pacific IPO volumes has involved onshore China listings. Wall Street is hoping for the good times to return.

Now that Volkswagen has just announced the price range for the superjumbo IPO of Porsche, you can sense the excitement.

Porsche is an iconic brand name, the deal size is massive, and blue-chip institutions and sovereign wealth funds will be participating as cornerstone investors. So if successful, does the Porsche IPO herald a reopening of the IPO market? Will the “blockbuster” IPO “jump-start [the] H2 IPO race”?

My view is: No.

What if it is a clamorous success?

My view still is: No.

The Porsche IPO will be a milestone for Volkswagen and Porsche, but it is hard to see much “read-across” to the broader IPO pipeline. Porsche is in some ways a straightforward company to take public. It has a long and storied history, it has been listed before, and investors are familiar with the business, its competitors and its market positioning. The listing is not introducing a new company so much as bringing back an old friend.

Although an IPO, the Porsche transaction is better understood as a carve-out of an established business from a bigger company.

Volkswagen has divided Porsche’s capital equally between ordinary and preferred shares. Just over 25 per cent of the ordinary (voting) shares will be sold to Porsche SE, the listed vehicle controlled by the Porsche and Piech families. The IPO itself involves the placement of up to 25 per cent of the preferred (non-voting) shares with investors, meaning that only 12.5 per cent of the share capital will be offered (raising €9.4bn at the top of the price range), of which around 40 per cent will be purchased by cornerstone investors.

For all its impressive size, not that much stock will be sold to new institutional and retail investors. But as with any partial carve-out, the listing will provide a market value to VW’s stake in Porsche, making it easier to calculate a so-called “sum-of-the-parts” valuation for VW and hopefully removing some of the conglomerate discount.

Bar chart of Operating income, 2021 (€bn) showing Porsche has driven profitability at Volkswagen Group

Even in a soggy market one would expect there to be substantial demand for Porsche shares. The only question is price, and investors will debate whether to benchmark Porsche’s valuation against automakers such Mercedes and BMW or luxury names such as Ferrari and Kering. Coupled with the support of the cornerstone investors, the IPO is likely to complete, absent the onset of nuclear winter in equity markets. And if VW are judicious in pricing, Porsche shares could rise in the after-market, delivering gains to investors whose year-to-date portfolio performance has ranged from difficult to dire.

But the reality is that a corporate carve-out of Porsche tells us little about the appetite for the kinds of small- and medium-sized growth companies that make up the bulk of the IPO pipeline.

The market headwinds that have battered the IPO market remain the same: higher interest rates, inflation, economic slowdown, geopolitical uncertainties, energy shortages, and so forth. Investor appetite for Porsche does not portend animal spirits for high-multiple growth stocks.

Ever so quietly, the IPO pipeline for 2022 is being pushed out to 2023. The reasons are varied. Growth stocks are trading at multiples well below their highs from a year ago, and it is too early and too painful to take public a company at a valuation below its most recent financing round.

In the meantime, company managements are starting to tire of preparing for the next market window, only to be advised to delay yet again. These managements have important day jobs — ie running a business in a tough business environment — and the stop-start of IPO preparation is distracting as well as expensive due to legal and other costs. It is therefore better to down pens and see if one can launch an IPO in spring or summer 2023 on the back of audited 2022 full-year results.

At the same time, there is a subtle, often unspoken dynamic as one approaches the end of what has been a poor year.

Normally, both the sellside (ie investment banks) and the buyside (ie asset managers) have an incentive to move up dealmaking as much as possible. Bankers usually want to execute a deal, and investors want to deploy their capital, as early as practical. But not so much right now.

If you’ve had a difficult year, you have psychologically written off 2022 and hope to start the following year afresh. No one deliberately engineers a delay, but sometimes the sense of urgency just fades as one approaches the end of a year of weak revenue generation. The manic pace just slackens a bit, as the focus turns to next year.

Moreover, investors will probably close their books to new issues earlier than normal this year (unless a new investment is a sure-fire winner), because any late-year gains will be unlikely to translate into performance fees. Muted investor interest in turn makes it inadvisable in many cases for a company to launch an IPO before year-end.

For all these reasons, the Porsche IPO seems a one-off: a partial spin-off out of VW of a legendary company, but not the harbinger of a reinvigorated IPO market.

The IPO market for 2022 is pretty much a wipeout, and the reopening will have to wait until at least 2023.


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