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BlackRock sounds alarm over IPO quality

The world's largest institutional investor has sounded the alarm over the quality of European IPOs as hedge funds increase their bets against private equity-backed flotations, after the market for companies going public was soured by a string of high-profile failures.

BlackRock said the flotation process needed to be improved, after the best six months for European IPOs since the financial crisis was ruined by poor market debuts from companies including Saga, the UK retirement group, Applus, the Spanish industrial testing business and eDreams Odigeo, the online travel agent.

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Rob Leach, BlackRock's head of Emea capital markets, sent an email to bankers telling them to consider "why the first half had been so poor" and asked them "how this trajectory can be altered in the short timeframe leading up to the next raft of IPOs only a month away".

BlackRock Inc. headquarters in New York City.
Adam Jeffery | CNBC
BlackRock Inc. headquarters in New York City.

The email from BlackRock comes as hedge funds have been ramping up their short positions in a number of recent private equity-backed listings including Pets at Home, Saga and Just Eat in the UK, according to regulatory filings. By shorting a stock, hedge fund managers are betting that it will fall in value.

BlackRock said that a "worrying feature" that was cropping up more frequently was "the failure of companies to achieve stated financial and business targets even after one or two quarters. Any thoughts on the lack of conservatism of projections or ability to diligence these targets also gladly received."

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Mr Leach told the Financial Times that the sheer volume of IPOs coming to market this year had affected communication between issuers and investors: "There has not been the same level of thoughtfulness and dialogue on valuation and structure."

BlackRock tracked 104 IPOs in Europe in the first six months of this year, of which 38 deals – just over a third – are trading below their issue price. The Eurostoxx index is down around 0.5 per cent so far this year. Twenty companies which had been planning to go public – including names such as retail chain Fat Face – pulled their flotations. This year €33.7bn has already been raised in the European IPO market, more than in any full year since 2007, according to PwC.

Some of the worst performing IPOs in Europe have been those brought to market by private equity investors, with eDreams Odigeo, backed by Permira and Ardian, and Applus, the Carlyle-backed inspection group, both issuing profit warnings soon after listing. Many private equity groups use independent advisory firms such as STJ Advisors, which investment bankers say are too aggressive on pricing.

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Investment bankers hit back at BlackRock's criticisms of recent IPOs. A senior banker at one large bank said: "BlackRock wasn't complaining after the first quarter when all the IPOs were up. Every potential investment should be looked at on its individual merits. The last time I checked, fund managers weren't forced to invest."

Mr Leach also told the FT that pre-marketing "pilot-fishing" meetings between companies and investors had become the norm, "but the question is what is concluded on the back of those meetings. It doesn't necessarily mean they're fruitful in terms of price discovery or next steps."

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It is not the first time BlackRock has vocally criticised the European IPO market. In May 2011 it wrote to investment banks, accusing them of "increasingly aggressive" behaviour around setting fee structures for IPOs. It also voiced concerns that banks were providing unrealistic valuations to companies in order to win their business.

Despite the high-profile underperformance of some IPOs, bankers said that some new issues such as European cable and mobile operator Altice, up 50 per cent, and Russian retailer Lenta, up 20 per cent, have done well and it is up to fund managers to pick the best companies to invest in.

—By Harriet Agnew and Miles Johnson, the Financial Times