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Bankers say companies are increasingly seeking the backing of “cornerstone” investors before going public on US markets, highlighting the difficulty of pulling off deals in a fragile market for stock listings.
Several high-profile initial public offerings this year have involved Cornerstone investors agreeing to have their names published in a company’s prospectus in exchange for receiving a guaranteed allotment of shares.
Instacart, a grocery delivery service, disclosed in a filing Friday that a number of investors led by Norway’s sovereign wealth fund plan to subscribe to $400 million of shares in a float, with IPO specialist Renaissance Capital estimating at $ Will raise 1 billion. British chip designer Arm is attracting big-name customers including Amazon as potential anchor investors in its IPO later this month, which is expected to be the largest in New York this year.
Both the deals are considered crucial to the successful re-opening of the IPO market, which has been active only briefly this year after a disappointing 2022. Three more high-growth companies considered critical to the health of the broader market — Israeli cosmetics group Oddity Tech, restaurant owner Kava and thrift store operator Savers Value Village — also included cornerstone investors.
Bankers predict a growing role for such backers in the coming months, as the sluggish market encourages more companies to secure the initial backing of big-name investors before being floated on public markets.
Eddie Molloy said, “When you have markets that are going through a difficult reopening period like now, when execution results can be uncertain, you will see more deals where companies have already bought the big names.” Just sold the shares,” Eddie Molloy said. Co-Head of Americas Equity Capital Markets for Morgan Stanley. “It’s a form of risk reduction.”
So far this year, companies have raised $10.3 billion from US IPOs, according to DeLogic. While it has already eclipsed $8.6 billion of the 2022 total, it is a mere shadow of the $154 billion raised in the 2021 spurt.
“We are increasingly talking about [cornerstones] “We want to explore any deal in the next six to nine months,” said David Bauer, head of equity capital markets at private equity firm KKR. “It’s not a prerequisite, but I think any issuer Will be looking for that kind of support and sponsorship.”
Cornerstone investing is a relatively recent addition to the US IPO markets, having become a regular feature after the Securities and Exchange Commission relaxed its so-called test for water provisions for all companies in 2019, allowing them to comply with IPO filings. Allowed to interact more freely with institutional investors. Registration. Earlier it was reserved only for small groups called “Emerging Growth Companies” under the rules introduced in 2012.
The change in US markets came as many companies took advantage of a boom in private capital to avoid going public until they were very large, creating stakes for underwriters tasked with filling the IPO order book. increased. More than a third of a $14 billion share sale of electric vehicle maker Rivian Automotive two years ago went to investors, as well as nearly half of a $2.6 billion stake sold by Brazilian banking group Nu Holdings in the same year.
Such investments have long been common in Asian deals, most often in Hong Kong, where they earned a reputation for promoting weak Chinese deals and diluting trading liquidity.
“Historically on US IPOs, investors would meet the company once at a roadshow and then submit an order,” said Keith Canton, head of the US equity capital markets team at JP Morgan. “We now have a situation where investors are meeting companies many times before the IPO – sometimes years in advance. He has seen companies perform in the private market and hence has a lot of conviction when it comes to IPOs.”
Oddity Tech’s $487mn float in July came with $100mn from investors including Bailey Gifford and Franklin Templeton, while Kava pre-sold a similar amount to Capital Group and T Rowe Price as part of its $365mn deal in June . Later that month, Savers Value Village sold a third of its $400 million deal to Norway’s sovereign wealth fund and Healthcare of Ontario Pension Plan. All three companies are still trading above their IPO prices.
Morgan Stanley’s Molloy said building the IPO order book, including the cornerstones, was a balancing act in the US market.
“While this helps build support and momentum for a deal, if too much goes on the cornerstone, it can deter new investors and wider inflows. Also, relying too much on existing investors as a cornerstone may give mixed signals to the market,” he said. “But even in strong markets, Cornerstone Investors are here to stay, because investors with strong credentials at launch are a feather in your cap.”
Unlike Hong Kong practice, US investors do not face any lock-up for their holdings, although they are considered long-term investors.
Lawrence Burns, a portfolio manager at Baillie Gifford, said the fund manager only took on cornerstone roles in companies he already knew well.
“Almost all the time it’s only possible if you have some knowledge of and relationship with the company,” he said. “If a company was going public and came to us when we’d never met them before and said ‘do you want the cornerstone?’ It will be very difficult for us to get comfortable with this – even for an IPO, let alone a decision on Cornerstone, much sooner.’