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S&P: European IPO market looks strong for 2015

New report says rising equity prices are encouraging PE firms to run dual-track sale processes

The pipeline for IPOs in Europe in 2015 is looking strong after a sluggish end to 2014, according to a report from Standard & Poor’s ratings services.

While the number of IPOs announced so far this year is lower than in the first quarter of last year – 14 compared to 19 – the average transaction size has been higher. Recent substantial IPOs noted by the report include Swiss telecom operator Sunrise Communications Holdings which, at CHF1.36 billion (€1.28 billion; $1.36 billion), was the fifth-largest IPO by targeted transaction size since the beginning of 2010. Another was Netherlands-based Refresco Gerber, a bottler of soft drinks and fruit juices, which announced a planned IPO at the beginning of March at a share price range of €13 to €16, which would value the company at up to €1.1 billion to €1.3 billion.

S&P also observed a broader distribution of IPOs across Europe in the first two months of 2015, with the UK accounting for 20 percent of European IPOs, the Netherlands accounting for 20 percent, both the Nordics and Spain racking up 13 percent, and 7 percent each in France, Germany, Italy, Switzerland and other European countries.

This contrasts with 2014, when the UK was much more dominant, accounting for 37 percent of IPO activity, while the Nordics accounted for a further 18 percent.

S&P noted that equity prices have increased substantially since the start of the year, with the FTSE Eurofirst 300 Index rising more than 15 percent to 11 March from the beginning of January, which has encouraged many private equity firms to run dual-track sale processes. So far, public listings are edging out private sales, the report said.

“There remains a lot of pent-up demand among private equity firms to exit certain businesses, particularly among sponsors that purchased companies right before or after the financial crisis and are looking to realize returns,” Standard & Poor's credit analyst Taron Wade said in a statement. “But investors are still being cautious. Only companies with positive growth stories that have performed well throughout the downturn are able to go to the public offering market.”

The debt reductions and partial exits in private equity ownership that tend to result from an IPO “often improve credit quality and lead to rating upgrades”. S&P also notes improvements in portfolio companies’ management and governance frameworks as they prepare for the greater oversight involved in public listing.

A steady stream of IPOs should also curtail the number of dividend recaps in Europe’s leveraged finance market, S&P said, to which private equity firms are often forced to turn to recoup cash in times when the IPO market isn’t favourable.