Forget making money in IPOs: They're Europe's biggest losers

ONE of the few groups to lose out in this year's hot European stock market has been investors who bought overpriced initial public offerings (IPOs).

Half of the year's 10 biggest decliners in the Stoxx Europe 600 Index went public in the past 15 months, with THG, Auto1 Group, Allegro.eu, Deliveroo and InPost all slumping 39 per cent or more, even as the benchmark surged 19 per cent. That is not a good look for Europe's IPO market, which is clocking its busiest year since 2007 and preparing for a blockbuster start to 2022.

All of these duds either service or operate e-commerce platforms, a sector that boomed during the early months of the pandemic's lockdowns. But their appeal waned as economies reopened, leaving these companies unable to sustain explosive growth. At the same time, many of them came to market with relatively high valuations, and investors questioned the governance of some, such as THG and Deliveroo.

"What we've seen is that the higher the volume, the lower the quality, and this year has precisely reflected that trend," said Luc Mouzon, head of European equity research at Amundi. Investors can end up "with extremely negative returns" if they are not selective, he said.

The worst of the losses came after the summer, as markets turned rocky amid concerns about supply chain issues, surging inflation and a resurgent pandemic. While the recent tightening of restrictions should be helpful for companies that benefit from lockdowns, the broader market risks are outweighing any temporary boost to their business as investors shift out of frothier growth parts of the market.

"Investors will be in wait-and-see mode, assessing the global economic recovery," said Susannah Streeter, senior analyst at Hargreaves Lansdown. "A lot of IPO valuations have been led by the expectations of future growth and some companies have seen their shares slide due to concerns about spiking inflation and expectations of rate rises."

Hero to zero

Aside from Deliveroo, which flopped in its debut and never properly recovered, the newly listed stock laggards bounced initially post-IPO. While macro worries contributed to the poor performance, company-specific headaches also hit hard.

Online shopping platform THG, which is coming in last with a 76 per cent slide this year, and food delivery platform Deliveroo were dragged lower by governance and valuation issues. InPost's stock suffered after the Amsterdam-listed parcel locker operator guided towards slower e-commerce volumes, while increased competition weighed on Polish e-commerce giant Allegro.

To be sure, it has not been all bad news for investors in IPOs. Of the more than 550 companies that went public in Europe this year, about half have risen from their offering prices. Fund managers also will have plenty of chances to make up their losses in 2022, with the first quarter looking chock-a-block for new offerings.

"By all counts, there's still very strong appetite for high-quality listings," said Loic Chenevier, Natixis' head of strategic equity capital markets for France and the Benelux region. BLOOMBERG