'Cornerstone' investors could become a necessary evil for European IPOs in 2012. Giving powerful backers guaranteed shares in return for large, early commitments to support initial public offerings would get short shrift in good times. But Europe's new-issues market is dysfunctional. And commodity trader Glencore's $10 billion float showed the technique can get deals away in tricky markets. It would be hard to design a worse backdrop for IPOs.
The eurozone crisis has made the continent's economic outlook both murky and gloomy, and has frightened investors away from riskier-looking bets. Spain's flagship lottery privatisation and the flotation of Osram, a huge lighting firm owned by Siemens, rank among the biggest of this year's many postponed equity deals.
In London this also follows a major breakdown of trust between IPO buyers, sellers, and the banks that put deals together. Cue months of squabbling about everything from the poor after-market performance of debutants such as Ocado and Betfair, to the optimum size of bank syndicates and the worth of pre-deal research.
Introducing cornerstones is one simple way to improve the prospects of big deals. The method, imported by Glencore from Hong Kong, relies on a small band of heavyweight hedge funds and other backers. When a prospectus is published, they commit to investing a fixed amount wherever in the price range a deal is struck, and to holding stock for at least six months. That takes some of the pressure off the main book-building process.
Of course, the setup can't do anything to improve the macro picture or allay general fears about the European IPO process. Moreover, it eats up management time, shifts the emphasis from company fundamentals to deal momentum, and creates two classes of investors - early-birds who get guaranteed share allocations, and everyone else. That could prove controversial if a stock soars soon after listing. That said, lots of companies remain keen to list. Cornerstones can extract big allocations - at potentially good prices - for helping these issuers bridge the demand gap. This time next year they could be the envy of the market.
Predictions: Breakingviews is publishing a series of articles over the holiday that look ahead to 2012. The pieces will be collected together in the annual 'Predictions Book', produced in print and electronic form early in the New Year. European equity fundraising fell to its lowest level for more than a decade in recent months, Reuters reported on December 9, citing annualised figures for August to November. A string of European initial public offerings have been cancelled or postponed this year, including Loterias of Spain; Evonik Industries and Osram of Germany; Britain's Edwards; and Denmark's ISS.
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