BlackRock warns over IPO Quality

Leading executive Rob Leach of BlackRock, the largest of the world’s institutional investors, has expressed concern over the recent high profile failures of private equity backed Initial Public Offerings (IPOs). Companies such as the UK retirement group Saga, Applus of Spain and online travel agent eDreams Odigeo had very poor market debuts, souring optimism that European IPOs were enjoying their best six months since the financial crisis of 2007.

Leach expressed his concerns to bankers in an email in which he expressed confusion over why the offerings “had been so poor” and calling for steps to avoid similar disappointment in the next round of IPO’s next month. He expressed concern that hedge fund managers appear to be betting against the success of forthcoming private equity backed offerings from such UK firms as Pets at Home and Just Eat.

BlackRock has expressed worry that recent business targets have failed to be met even after two quarters, with the suggestion being that previous estimates were inflated and that more conservative projections were called for. Leach thought that part of the problem is that so many IPOs have been offered this year that investors have not been able to properly evaluate the actual circumstances against which projections were made. He called for greater “thoughtfulness” and urged investors to act on the merits of each offering on an individual basis.

According to BlackRock, of 104 IPOs offered in Europe during the first half of 2014, over a third of them ended up trading beneath their issue price. Overall, the Eurostoxx index is a half a percent down in 2014. Of those companies who planned to offer IPOs this year, twenty of them have cancelled, including the retail chain Fat Face. Despite these disappointments, the amount raised so far in the European IPO market in 2014 is the highest since 2007.

Some critics have suggested that part of the problem is that the worst performing IPOs were brought to market by independent advisory firms that were too aggressive on pricing. But not everyone is going along with BlackRock’s criticism. Investment bankers have pointed out that BlackRock was not critical earlier in the year when all seemed to be going well.

In fact, BlackRock has been a frequent critic of the European IPO market in recent years. For example, in 2011 BlackRock complained about “increasingly aggressive” IPO fee structures and unrealistic valuations. Yet, others still insist that as long as fund managers are careful in their analysis, there are still many good companies for investment.

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