The S&P 500 has breached 3,000 for the first time – but the market for initial public offerings is certainly not celebrating.
The world’s biggest stock sale of the year looks likely to price at the lower end of its price range, and a big U.K. listing has just been pulled. Rising markets may be making issuers greedy. Buyers of IPOs are mean.
Companies going public face two headwinds. Stocks are increasingly owned by passive funds: Greater flows into indexes may push these benchmarks up indiscriminately, but active funds – the natural buyers of newly issued shares – are dwindling as a force.
That structural problem has coincided with growing unease about the economic outlook and doubts about whether stocks can go much higher. Active investors are concerned about geopolitical risks and growth. No one want to own a new issue when markets turn.
The IPO of Anheuser-Busch InBev NV’s Asian business has the qualities to overcome these obstacles. The brewer is growing rapidly and is also gigantic – a likely market value of about $60 billion should guarantee its place in the benchmark indexes. IPO investors know that passive funds will follow them in. Pricing at the bottom of the range would bring no shame; the guidance was too bubbly to begin with.
Swiss Re’s ReAssure Group Plc is still big – the company was set to have a market value of about $4.1 billion – but not big enough to have qualified for inclusion in the U.K.’s FTSE-100 Index immediately.
It also suffered competition in the form of Phoenix Group Holdings Plc, another consolidator of life-insurance funds. Investors in vehicles of this type crave income and ReAssure would have had to price its shares at sufficiently low a level to offer an even higher dividend yield than Phoenix’s lofty 6.5%.
Swiss Re and fellow shareholder MS&AD would still have had big stakes in the business, creating the risk of more shares unexpectedly coming on to the market at a later date, hurting the stock price.
It’s possible that Europe’s MiFID II directive also played a part. Equity research coverage, and with it equity sales, has become more fragmented. Underwriters’ tentacles don’t have the same reach into the market as they used to.
In the end, Swiss Re didn’t need the money enough to swallow the embarrassment of a lower valuation than might have been achieved from an outright sale.
The last three months have seen IPOs surge, with the technology industry in particular booming. But issuers would be wrong take the buoyant stock market as a guide to the new-issues market. IPO investors are active and, with that, picky. Smaller companies may just have to stay private until they are too big to ignore.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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