Risk Trade Is Back: Bank of America Exec
Emphasizing the importance of both momentum and psychology, Dan Cummings, head of global equity capital markets for Bank of America Merrill Lynch, told CNBC on Tuesday, that there is little bit of both right now, causing a return of the risk trade.
"The risk trade is back in the market. Last year where we were focused mainly on recapitalizing and fortifying balance sheets, this year the risk trade has moved into some of the growth names," Cumming said, adding, "investors will look to the IPO market to generate some alpha in their portfolio."
Bank of America is part of the syndicate, along with Deutsche Bank , Goldman Sachs and JP Morgan Chase , which will be the joint global coordinators of AIG's secondary offering.
"For investors, there's a risk-adjusted return for their investment and what happens in the after-market is very important. One of the things that we don't want to see, frankly, is five years of price appreciation in one day," he said.
At the same time, the price needs to be such that the investors are compensated for the risk of buying a company that hasn't been public, and also for a company that may have other risks that are unique to it, Cummings said.
"The way deals are pricing right now, the intersection of where people are willing to sell and where people are willing to buy, if both sides are a little unhappy, you probably got a good deal," he said.
"If you look at the IPO historically, it has been the source of some outperforming, and importantly its an opportunity for an investor to follow a company from its inception and through its growth phases," Cummings said.
Private equity's backlog of IPOs include HCA, Kinder Morgan, Toys R Us and Nielsen Holdings, which is expected to price on Tuesday evening, and likely to raise $1.7 billion dollars.
Bank of America's IPOs this week:
- Nielsen: Co-manager, Size $1.58 billion
- BankUnited: Joint Book Runner, Size $630 million
- Interxion: Joint Book Runner, Size $222.6 million
Reacting to speculation that several non-public tech companies—Facebook, with implied market cap $50 billion, Twitter, with implied market cap of $4 billion, Zynga, with implied market cap of $6 billion, and Groupon, with implied market cap of $15 billion (or more)—potentially coming to market, Cummings said, "What's important is looking at the components and the characteristics to these stocks, their distributive business models, their revenue are growing top-line."
"You can look at these, and it isn't as much as what it's worth today, it really is what is the vision. And there is an element of 'dare to dream' embedded in some of these stories, but frankly that is part of what we sell, which is the future," he said.
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