Jefferies 2009 European IPO Investor Survey · 2017. 3. 2. · THIS IS NOT INVESTMENT RESEARCH Jefferies 2009 European IPO Investor Survey Jefferies 2009 European IPO Investor Survey

THIS IS NOT INVESTMENT RESEARCH Jefferies 2009 European IPO Investor Survey

Jefferies International Limited Vintners Place 68 Upper Thames Street London EC4V 3BJ, United Kingdom

+44 (0) 20 7029 8000

Investment Banking Sales & Trading Research Asset Management

www.jefferies.com

Jefferies 2009 European IPO Investor Survey July 2009

Jefferies International Equity Capital Markets Rupert Mitchell Managing Director Head of Equity Capital Markets +44 (0) 207 029 8431 [email protected]

Jefferies International has just completed an institutional investor survey to poll views on the prospects for the European IPO market. Respondents included analysts, PMs, and dealers from over 40 European-based investment institutions and hedge funds.

Key Survey Findings

• 83% of participants see the IPO market re-opening in the UK and Continental Europe by the end of H1 2010, with 23% seeing the IPO market re-opening by the end of 2009.

• In terms of leading indicators, most investors saw reduced equity market volatility (58%) and an end to the rescue financing activity (60%) as most vital to the IPO market returning to life. Only 48% of respondents indicated that evidence of actual GDP growth was a necessary precursor.

• 40% of respondents felt that classic growth stories, similar to the deals priced in the US, with their tech themes, would be best received at the early part of the cycle. 46% felt that more defensive-growth companies would lead.

• Nearly half of the respondents said that profitability was not required at IPO stage – as long as there was a clear path to profitability, defined as being one to two years away. However, 29% of investors stated that they would only buy shares in the IPO of a profitable company.

• Institutional investor interest in IPOs starts to become significant at a US$100m deal size and continues to rise for IPOs with an anticipated free float of US$200m or greater.


Jefferies 2009 European IPO Investor Survey I July 2009 2

About Jefferies

Jefferies, the investment bank, has been providing clients and investors with expert advice and execution for over 45 years. With offices in over 25 cities worldwide, Jefferies provides clients with capital markets and advisory services, institutional brokerage, securities research and asset management services. The firm is also a leading provider of trade execution in equity, high yield, convertible and international securities for institutional investors and high net worth individuals. Jefferies & Company, Inc. is the principal operating subsidiary of Jefferies Group, Inc. (NYSE: JEF; www.jefferies.com). Jefferies International Limited, a UK-incorporated, wholly owned subsidiary of Jefferies Group, Inc., was established in London in 1985 and is authorised and regulated by the UK Financial Services Authority.

Jefferies has deep sector expertise in a number of dedicated industries including aerospace & defense, clean technology, consumer & retail, energy, financial services, gaming & leisure, healthcare, industrials, maritime, media, telecommunications and technology, with a dedicated private equity coverage group. Jefferies has over 400 investment banking professionals serving companies in North America, Europe and Asia and has a long track record of supporting financial sponsors through sector-based advisory teams and financial products.

About Jefferies Equity Capital Markets

Jefferies’ Equity Capital Markets team comprises 21 dedicated professionals based in New York and London, offering clients the full equity capital market product spectrum including Initial Public Offerings, Placings, Pre-emptive Capital Raisings, and Convertible / Exchangeable Bond issuance.

Year to date, Jefferies’ Equity Capital Markets teams have raised over US$3bn in 22 transactions for clients. This includes underwriting four of the 11 US IPOs that have occurred in the year ending 30 June, including Rosetta Stone, DigitalGlobe, SolarWinds, and MediData Solutions. The firm has also been active in the follow-on market both in the US and in Europe, executing transactions for Afren, Central European Distribution Corporation, CashAmerica, JZ Capital Partners, Jazztel, Aurelian and Solutia.

About Jefferies Global Equity Distribution Platform

Jefferies’ equity distribution platform is supported by nearly 700 sales, trading and execution professionals globally. This figure includes 100+ professionals outside the US, with offices in London, Frankfurt, Paris, Singapore, Hong Kong and Tokyo.

The Firm has more than 200 institutional sales professionals that cover over 4,000 clients globally and has execution capabilities across more than 30 countries in Europe, Asia and North America. Jefferies makes markets in over 2,200 stocks and trades in more than 10,000 names globally. The Firm is also a Top 10 trader in over 2,000 NASDAQ stocks. Internationally, Jefferies' equity platform trades over 50 million shares daily.

Jefferies is also a top trader in the global secondary convertible market, with over 250 institutional relationships. Jefferies trades and makes markets in over 480 global convertible issues. The platform consists of 48 professionals based in London, Zurich, Tokyo & New York.

Recent Developments at Jefferies

• 17 June, Jefferies appointed a Primary Dealer by the US Federal Reserve Bank of New York

• 21 July, Jefferies announced appointment of Ben Lorello to Chairman of Investment Banking

• 21 July, Jefferies announced major expansion to its Global Healthcare Investment Banking effort with the appointment of Sage Kelly as Head of Global Healthcare Investment Banking

• 21 July, Jefferies reported record second quarter results for the quarter ending 30 June 2009



Introduction

On the back of a global equity market rally that began mid-March, the primary equity capital markets have roared back to life. In May, the US equity capital market saw the highest volume of new issuance in its history, with over US$67bn raised. Europe and Asia-Pacific also experienced significantly heightened issuance volumes. The global convertible market re-opened as did the high-yield market. It became clear that with the capital markets re-opening, corporates were moving swiftly to take advantage of the upturn in investor sentiment and raise capital.

Most startling, however was what appeared to be unfolding in the IPO market. Renewed risk-appetite saw small, high growth, technology-oriented IPOs with deals that included high portions of secondary, pricing at the upper end of their ranges, or above, on the back of heavy over-subscription. Many of these offerings subsequently traded up significantly in the aftermarket. Some of these issuers had just begun to demonstrate profitability. The majority of IPO activity has been in the US, with Asia, the Gulf, and Brazil also witnessing successful IPOs during this period. But missing out from the excitement were real corporate IPOs in Europe.

Question 1

“Does activity in the US IPO market have any bearing on what is likely to happen in the UK / Europe?”

Source: Jefferies International Limited

Since the start of 2009 through end-June, there have been 11 corporate IPOs successfully priced in the US equity capital market, raising in excess of US$2.1bn. Ten of those deals occurred during the two months between mid-April and mid-June, and were priced in the midst of the global equity market rally. Notably, subscription levels were strong, with several deals pricing at the upper-end of their indicative range or above. Aftermarket performance has been strong, with all but two IPOs remaining above issue price as of today.

In Europe, aside from a small US$166m Warsaw listing and a couple of fund-oriented London-listings, the market has not seen real IPO activity. However, given the global nature of investing and sentiment, the Jefferies IPO survey has sought to discern the extent to which IPO momentum in the US and elsewhere has a bearing on IPO activity on this side of the Atlantic.

The vast majority of survey respondents believe that there is a sentiment “spill-over” effect, albeit with some degree of lag. Only 11% of investors believe that UK / Europe would be isolated from activity occurring in the US and elsewhere.

11%

75%

14%

0%

20%

40%

60%

80%

No, not at all Yes, but there will be a time lag Yes, there should be an immediate read-through



Select YTD IPO Activity

ISSUER PRICING

DATE EXCHANGEDEAL SIZE

(US$M) POST-IPO

MARKET CAP %

PRIMARY IPO(1)

DISCOUNT T + 1(1) T -

CURRENT(2)

LogMeIn Inc. 30-Jun-09 Nasdaq 123 354 75% 18.5% 25.1% 20.38%

Companhia Brasileira de Meios de Pagamento 25-Jun-09 Sao Paulo 4,258 10,380 0% NA 11.8% 15.93%

MediData Solutions Inc 24-Jun-09 Nasdaq 101 313 100% -21.7% 21.4% 18.00%

Duoyuan Global Water Inc. 24-Jun-09 New York 101 350 100% NA 36.7% 83.88%

Chemspec International Ltd 23-Jun-09 New York 73 327 78% NA 0.0% 5.11%

Bogdanka SA 16-Jun-09 Warsaw 166 463 100% NA 24.0% 28.02%

OpenTable Inc. 20-May-09 Nasdaq 69 441 52% 2.2% 59.5% 51.95%

SolarWinds Inc. 19-May-09 New York 174 802 74% -10.1% 10.0% 53.36%

DigitalGlobe Inc. 13-May-09 New York 279 853 9% 20.2% 13.2% -5.37%

Rosetta Stone Inc. 15-Apr-09 New York 129 366 50% -24.7% 39.6% 49.50%

Bridgepoint Education Inc. 14-Apr-09 New York 163 559 26% -17.3% 5.7% 74.00%

Silver Base Group 3-Apr-09 Hong Kong 134 534 100% NA -0.10 0.58%

Changyou.com Ltd 1-Apr-09 Nasdaq 138 820 50% -24.3% 25.1% 160.31%

Mead Johnson Nutrition Co 10-Feb-09 New York 828 4,908 100% -15.0% 10.1% 54.17%

Source: Dealogic Denotes Jefferies Transactions (1) Jefferies Research (2) As of 27th July 2009

Question 2

“When do you expect there to be an active IPO Market in the UK / Europe?”

History has shown that the US leads the UK / Europe by two to three quarters in terms of renewal of deal activity. Responses to the survey reflect this, with 60% of respondents seeing full normalisation in H1 2010 and nearly one in four investors actually see the IPO market in Europe returning this year. Very few investors saw the IPO market only returning in second half 2010.


60%

23%17%

0%

10%

20%

30%

40%

50%

60%

70%

End of 2009 First half of 2010 Second half of 2010



Question 3

“What are the most important macro / market requirements for a recovery in UK / European IPO markets?”

In terms of leading macro-indicators that may portend a recovery in IPO activity in the UK / Europe, institutional investors were asked to rate four key indicators in order to assess each of these in terms of importance.

Reduction in equity market volatility was a clear standout. In volatile markets, investors have less time to devote to an IPO investment decision and risk tolerance diminishes, with a negative impact on issuers’ pricing objectives. Against a calmer equity market backdrop, the process of price-discovery can be conducted with less “noise,” with investors and underwriters able to focus on the merits of the business, investment case and equity story.

Expectations of an economic turnaround, as opposed to hard evidence of GDP growth, figure prominently as well in investors’ minds. Finally, investors also declare that IPO market activity will be encouraged by a reduction in fund outlays for balance sheet repair, the conclusion being that a greater supply of investor “cash” should help to support demand for IPOs.

Reduction in Equity Market Volatility Evidence of Actual GDP Growth

Expectation of GDP Growth in the Next 1-2 Quarters Reduction In Balance Sheet Repair Activity


Important48%

Irrelevant35%

Vital17%

Important58%

Irrelevant8%

Vital34%

Important54%

Irrelevant18%

Vital28%

Important60%

Irrelevant20%

Vital20%



Question 4

“What types of equity stories will likely receive the best audience in an early cycle UK / Europe IPO market?”

Somewhat contrary to expectations, the early batch of IPOs out of the US, with the exception of Mead Johnson, have been on the smaller end of the capitalisation spectrum, high-growth, often technology / internet stories and some had just turned profitable, as opposed to the larger-cap, defensive / yield stories.

Judging from the oversubscription generated, strong pricing and aftermarket trading, investors have responded well to high-beta stories. Responses from our survey indicate a bullish viewpoint on what types of companies could be expected to lead the upturn in IPO activity, with a visible belief in the high-beta names.


Question 5

“How would a company's choice of listing venue (junior market (i.e. AIM) vs main market) impact your investment interest in an IPO?”

With the latest financial crisis spawning its cases of fraud and market manipulation, investors are again prioritising corporate governance and high listing standards. Our survey sought to gauge views on receptivity for junior market IPOs (e.g. AIM). The responses indicated that junior market IPOs are unlikely to be a major feature of the early IPO cycle.


40%46%

14%

0%

10%

20%

30%

40%

50%

Defensive growth Classic growth Yield / Income

68%

32%

0%

20%

40%

60%

80%

I am very unlikely to invest in an IPO listed on a junior market

I am indifferent to choice of listing venue, provided the story is good



Question 6

“Everyone understands the importance of liquidity these days. What level of public free float would, in your view, be a minimum size to be viewed as "investable" in the context of a new IPO?”

During H2 2008, liquidity became the primary concern for investors, ahead of valuation. Redemption pressures for hedge-funds and “fear” drove investors into cash or only the most liquid securities.

Although the redemption cycle looks as if it has run most of its course and risk-appetite has gradually improved, there is still hesitation on the part of institutional investors to step into small-cap stocks.

In an effort to guide IPO candidates and maximize the potential for offer success by meeting investors’ criteria, the survey sought to discern a preferred minimum IPO size.

Institutional investor interest in IPOs starts to become significant at a US$100m deal size and continues to rise for IPOs with an anticipated free float of US$200m or greater.


22%

32%35%

5% 6%

0%

10%

20%

30%

40%

US$50m+ US$100m+ US$200m+ US$500m+ US$1,000m+



Question 7

“Has the Open Table IPO turned back the clock? Is profitability still a key ingredient of a successful IPO?”

The IPO of Opentable.com was a watershed for the US IPO market 2009 YTD. With the company just becoming profitable on an LTM basis, but having high forecasted growth, notably internationally, and a revenue mix containing c. 54% subscriptions, investors bid hard for the stock during the road show, resulting in the price range being increased from US$12 – US$14 / share to US$16 – US$18 / share. Shares subsequently rose 59% on the first day of trading. The question for corporates, VCs, and underwriters, was whether this signaled a return to 1999?

More importantly, would Opentable.com have been able to successfully IPO in the UK or on a Continental exchange? Would UK / European institutional investors subscribe for shares of a company which has just turned profitable?

According to the survey, most investors will participate in an IPO if a path to profitability is visible within one to two years. Profitability at the time of IPO does not appear to be a prerequisite.


22%

49%

29%

0%

10%

20%

30%

40%

50%

60%

Near term profitability not essential provided strong evidence of growth

and cashflow generation

No, but there must be a clear path to sustainable profitability within 1-2 years

Yes. I will only buy a company with a strong track record of profits.



Question 8

“In the absence of a historic PE valuation framework (i.e. company loss making), what metrics would you be comfortable employing in the context of an IPO?”

If investors are open to investing at IPO in companies which are close to profitability, but not yet profitable, a key issue remains as to which alternative valuation metrics they are most comfortable with.

Forward EV / Revenue

Forward EV / EBITDA

Forward EV / Operating FCF Discounted Cash Flow


Key metric17%

Not at all21%

Useful cross

reference62%

Key metric46%

Not at all11%

Useful cross

reference43%

Key metric43%

Not at all6%

Useful cross

reference51%

Key metric37%

Not at all21%

Useful cross

reference42%



Historical Perspective: The IPO Cycle Upturn in 2003 – 2004 and Today


Looking back to the previous cycle, the European IPO market did not stage a visible recovery until Q1 2004, c. 2-3 quarters after a normalising US and Asia-Pacific IPO market. Analyzing the make-up of the initial IPO successes reveals a theme of large-cap, utility or utility-like, regulated assets whose floatation was driven by government owners or, as in the case with Yell, by its financial sponsor owners. This was a time of European Union privatisation initiatives and the beginning of the financial sponsor-driven exit cycle. Interest rates were ultra-low and institutional equity investors sought the stability of companies with recurring and predictable cash-flows.

However, it should also be noted that within this, a technology IPO market in Europe was beginning to develop, with the highly successful IPO of Wolfson Microelectronics in October 2003. Globally, equity markets were rallying as the US and other major economies were posting growth figures, with equity markets running up c. 50% from their mid-March lows. Wolfson, the UK-based advanced chip designer whose semiconductor chipsets were being used in Apple’s i-Pod, successfully priced a US$132m IPO that saw shares trade up +17.4% on the first day. At the time of the IPO, the company had revenues of US$29.2m and net income of US$2.6m, profitable at the bottom-line since 2001.

In Q1 of the following year, 2004, momentum in the European TMT IPO market was boosted significantly, with the IPOs of Iliad, CSR and Civica. By the end of the quarter, with the US$4.4bn IPO for Belgacom pricing and trading up, it was apparent that the European IPO market was truly open. Across the capitalisation, growth profile and sector spectrums, the signs were clear: the European IPO market was open for business.

Survey methodology: the survey comprised a web-based, drop-down style series of questions and responses that respondents selected. The link to the survey was distributed by Jefferies International equity sales and equity research teams to their buy-side clients. Given the fixed nature of the responses, the data was then collated. Respondents included analysts, portfolio managers and dealers from over 40 European-based institutions.

0

20

40

60

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100

120

140

1999

Q1

1999

Q2

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1999

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2000

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2000

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2001

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2004

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2005

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Americas Asia-Pac Europe

0

10

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60

2003

Q1

2003

Q2

2003

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2003

Q4

2004

Q1

2004

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2004

Q3

2004

Q4

Americas Asia-Pac Europe

US$ Billions

US$ Billions



IMPORTANT DISCLOSURE

This report has been prepared by investment banking personnel of Jefferies International Limited and may not be supported by independent analysis. This document is a marketing communication and is not and should not be construed as investment research.

The document is being furnished for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any security, future or other financial instrument or product. It is not intended to form the basis of an investment decision and has not been verified. Jefferies International Limited (“Jefferies”) makes no recommendation or representation as to, and accepts no responsibility or liability for, the accuracy or completeness of the information contained herein. Such information is presented as of the date and, if applicable, time indicated and Jefferies does not accept any responsibility for updating any such information. Any market views or opinions expressed herein are those of the individual sender, except where such views or opinions are expressly attributed to Jefferies or a named individual. Market views and opinions are current opinions only; Jefferies and the individual sender accept no responsibility to update such views and opinions or to notify the recipient when they have changed. This document has not been reviewed by, or discussed with, any member of Jefferies’ research department. It is not intended to be, and in no way constitutes, a “research report”, as such term is defined in Rule 137 promulgated under the US Securities Act of 1933, as amended. Jefferies’ investment banking department has done, and may continue to do, business with companies referred to in this document.

Jefferies and its affiliates, officers, directors and employees may from time to time hold long or short positions in, buy or sell (on a principal basis or otherwise), or act as market maker in, securities, futures or other financial instruments or products related to matters discussed herein and may make trading decisions that are different from or contrary to any of those which may be discussed. Jefferies is not an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction, and is not providing any advice as to any such matter to the recipient. The recipient of this document should take their own independent advice with respect to such matters.

In the UK, this document is intended for use only by persons who have professional experience in matters relating to investments falling within Articles 19(5) and 49(2)(a) to (d) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended), or by persons to whom it can be otherwise lawfully distributed. In the member states of the European Economic Area this document is for distribution only to persons who are "qualified investors" within the meaning of article 2(1)(e) of The Prospectus Directive. For Canadian investors, this document is intended for use only by professional or institutional investors. None of the investments or investment services mentioned or described herein is available to other persons or to anyone in Canada who is not a "Designated Institution" as defined by the Securities Act (Ontario). For investors in the Republic of Singapore, this material is intended for use only by accredited, expert or institutional investors as defined by the Securities and Futures Act and is distributed by Jefferies Singapore Limited which is regulated by the Monetary Authority of Singapore. Any matters arising from, or in connection with, this document should be brought to the attention of Jefferies Singapore Limited at 80 Raffles Place #15-20, UOB Plaza 2, Singapore 048624, telephone: +65 6551 3950. Recipients of this document in any other jurisdiction should inform themselves about and observe any applicable legal requirements in relation to the receipt of this document.

Jefferies International Limited is authorised and regulated in the United Kingdom by the Financial Services Authority. Its registered office is at Vintners Place, 68 Upper Thames Street, London EC4V 3BJ; telephone +44 (0)20 7029 8000; facsimile +44 (0)20 7029 8010.

Reproduction or redistribution of this document without the written permission of Jefferies is expressly forbidden.

© 07/2009 Jefferies International Limited.

Jefferies International Limited

Vintners Place 68 Upper Thames Street London EC4V 3BJ, United Kingdom +44 (0) 20 7029 8000

Investment Banking Sales & Trading Research Asset Management

www.jefferies.com

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