European mid-sized stocks trading at cheap valuation levels is discouraging a number of more richly valued private companies from making the jump and listing on exchanges, investors say.
After years of underperformance, mid-caps in Europe trade at the lowest price-to-earnings levels relative to big caps since the Great Financial Crisis. At these depressed valuation levels, smaller firms weighing initial public offerings are reluctant to come to the market at levels acceptable for investors, says Sebastien Ribeiro, a fund manager at Amiral Gestion, in Paris.
Small Caps Are Historically Cheap
“Why would I buy into an IPO? I’ve got a playing field of 600 listed companies which have never been as discounted as today,” Ribeiro said. He bought shares in French software firm Planisware SA’s IPO in April as it was priced reasonably, but the deal was a “rare” exception, he said.
Europe’s small and mid-cap stocks have fallen out of favour over the past years, hit by rising interest rates and slowing economic growth in the region. They are now trading at 5 to 6 times earnings before interest, tax, depreciation and amortization. In the five years through the end of 2019, before markets were affected by Covid, soaring inflation and higher rates, small- and mid-sized companies were fetching about 9 times earnings in European IPOs, according to data compiled by Bloomberg.
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European Small Caps' Underperformance | Larger peers have created major gap in past two years
European large caps have surged by about 37% since early 2021 while at the other end of the spectrum, their smaller peers are up by a meager 5.5%. That’s not likely to encourage unicorns such as France’s medical-appointment booking app Doctolib or car-sharing app BlaBlaCar to consider going public.
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“If mid-caps don’t re-rate, I don’t see how the market could absorb IPOs from French tech,” said Sebastien Lalevee, managing director at Financière Arbevel.
That’s not to say that the comeback in European IPOs is on the rocks. Companies in the region have raised US$12.4 billion by IPOs this year, more than double the amount in the same period of 2023. Luxury sneaker brand Golden Goose SpA plans to kick off an initial public offering in Milan as soon as this week that’s expected to value the company at about 11 times earnings, Bloomberg News reported Sunday.
But plenty of other companies are finding that investors won’t reward them with such a rich valuation. In April, Spanish holding company Bergé y Compañía pulled plans for an IPO of its Astara car-distribution business. Jordanes ASA, an owner of Scandinavian food and casual dining brands, last week scrapped a listing of its shares in Oslo.
Besides Golden Goose, firms considering launching IPOs in the coming weeks include Spanish fashion retailer Tendam, German Greyhound bus owner Flix and wheelchair maker Sunrise Medical, Bloomberg News has reported.
Still, fund managers expressed concern over whether private equity firms, whose portfolio companies often constitute a sizable portion of new listings, would bring out mid-sized IPOs at valuations investors find compelling in the current environment.
Buyout firms can seek an alternative to an IPO: If the valuations are too low, they can try to sell a business to one of their competitors. Private equity firms are paying roughly 9 times earnings to acquire companies, much higher than the valuations in the stock market, Amiral’s Ribeiro said.
Financière Arbevel’s Lalevee said that the valuation gap between mid-cap stocks and private companies means investors now have to take a close look at the price offered by a private equity firm seeking to exit an investment through an IPO.
