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IPO Outlook Improved by Successful Block Trades

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February 21, 2017

New listings might well be on the way in the months ahead. This newfound positive mood for initial public offerings (IPOs) is driven by banks selling large blocks of stock in the European market – and succeeding in the deals.

 

The Financial Times published a post on the positive start to the year’s IPO sector, especially in terms of successful block trading. These “block trades” are fast and remove the need to wait for the IPO for months. Instead, investment banks bid for the block of shares in a generous, discount price and then sell the blocks forward on to the market. The instant nature is a great indication of the market mood at any point.

 

Right now, the market mood looks hungry. According to Dealogic, 70 accelerated offerings have taken place this year. These deals have been worth around €11.3bn, which is move than double the value of previous year’s sales during the same period. Last year saw market confidence plummet due to China’s economic jitters and the volatile political landscape in Europe prior to the Brexit vote.

 

Nonetheless, the frequency of the trades is not heightened compared to previous years. Dealogic data also reveals the volume this year has been similar to the €12bn of block trades in 2013 and 2014. If compared to 2015, the current levels are lacking behind the €22bn total deals made that year.

 

Successful block sales will be able to drive up the share price and provide benefits to investors. Philips Lighting early sale of €650m is a good example of the rising share prices after a block trade. The bulb maker saw its shares increase 4% between the close of trading on 8th February and the market opening the next day.

 

Opportunities for private equity

 

The accelerated offerings offer an opportunity to private equity firms and early investors. These groups, together with governments, are often driving these trades. A typical example is having a private investment company invest in an IPO and then pick the right moment to sell the shares forward soon after the initial listing.

 

According to Fançois-Olivier Mercier, head of block trades in Europe, the Middle East and Africa for UBS, the low levels of market volatility drive the current market mood across Europe. He also told the Financial Times, investor portfolios are heightened with cash and the lucrative gains made in the sector at the start of the year are growing the appetite for more. “All of the factors which have helpful for the block trade market are likely to be helpful for the IPO market as well,” Mercier said.

 

The year has already seen plenty of activity from private equity firms. The follow-on trades have taken place in the initial listings of Flow Traders and Wordplay. Private equity firms may well utilise the option of block trades as part of mergers and acquisitions. In the UK, 15% of block trade sales are by new companies looking to raise capital.

 

Success in the block trade sales is another indicator the market mood might be ripe for a strong IPO year.

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