Caution Reigns In Europe As Schott Pharma Breathes New Life Into German IPO Market

One of the biggest curiosities of the stock market recovery in Europe has been centered around the return of the IPO market. Following on from a whirlwind 2021, the economic headwinds of 2022 killed new market debuts in their tracks. Could the recent successful debut of Schott Pharma become a launchpad for a return to form for initial public offerings?

There’s no getting away from the shadow cast by the IPO frenzy of 2021. With an aggregate of over $627 billion offered over 3,262 transactions according to S&P Global data, 2021 has been by far the most lucrative year of the 21st Century for deals. 

While a market cooldown seemed inevitable, the aggregate $23.93 billion offered in Q1 2023 represented the lowest quarter for IPOs since the beginning of 2019, eliminating much of the momentum gained in the wake of the COVID-19 pandemic. 

With widespread tech stock sell-offs throughout 2022 and the emergence of post-pandemic complications manifesting in high inflation and reactive interest rate hikes from central banks, many CEOs have been wary about launching IPOs in Europe and the US alike throughout recent months. 

However, the September initial public offering of medical vials manufacturer Schot Pharma has weighed in as Germany’s largest IPO of the year and has been positively received on the Frankfurt Stock Exchange. 

Shares in the company climbed 16% on Schott Pharma’s first day of trading, closing at €31.30–comfortably higher than the €27 paid by investors during the IPO process. 

Backed by the Qatar Investment Authority (QIA), Schott Pharma, a unit of Schott AG, has claimed that the IPO could raise up to €935 million. 

Speaking on the successful debut, Christoph Heuer, co-head of equity capital markets (ECM) for Northern Europe at BNP Paribas, said: "It is a super start in the reopening of the IPO market after the summer. The market has been challenging to navigate in the last two weeks, but investors were convinced of the equity story."

Aside from Porche’s blockbuster IPO in 2022, Germany has been experiencing a significant drought echoed across many Western markets owing to lingering economic issues including consecutive interest rate hikes and the impact of Russia’s war in Ukraine. As a result, many companies have sought to put their listing ambitions on ice while the prospect of volatility continues. 

In addition to this, German private banking company OLB abandoned plans to launch an IPO in early 2023 owing to the collapse of Silicon Valley Bank in March, which prompted fears of an upcoming global bank run. 

However, European stocks are performing well throughout 2023, and Germany’s DAX Index consisting of the Frankfurt Stock Exchange’s 40 largest blue chip companies is trading 10% higher than at the beginning of the year. 

So, in light of Schott’s success and recovering markets in Europe, could we be staring at a more widespread IPO market recovery in the West? 

Cause For Caution

While Schott Pharma’s strong debut is certainly a welcome sight following the testing economic climate felt across Europe throughout 2022 and much of 2023, it’s likely that widespread uncertainty will continue to delay any meaningful IPO market recovery over the coming months. 

“There are a number of factors that could affect the market, including interest rates, inflation, geopolitics, and global markets,” warns Maxim Manturov, head of investment research at Freedom Finance Europe. 

“Uncertainty over interest rates could put upward pressure on bond yields and cause stock prices to fall. Inflation is also a concern as it could undermine corporate profits and consumer spending.”

The dangers of US interest rate hikes have played a role in generating a relatively volatile IPO market that’s keeping Europe grounded for the time being. 

With interest rates in Europe reaching as high as 30% in Turkey, 13% in Hungary, 7% in the Czech Republic, 6% in Poland, 5.25% in the United Kingdom, and 4.5% in the Euro Area, liquidity risks could be set to impact IPO performance long into the future. 

EY data concludes that this prospect of tighter liquidity and the rising cost of capital is causing investors to alter their behavior, and to turn to companies that showcase strong fundamentals and a path to profitability. 

As a result of these findings, it’s clear that IPO prospects must demonstrate their financial health and ability to leverage a value proposition for investors prior to establishing their offering. 

Such caution wasn’t as prevalent during the IPO frenzy of 2021, but it could ultimately pave the way for a more sustainable market outlook, with more companies focusing on establishing themselves as viable investment prospects that can offer long-term value for investors. 

Brightening Prospects For 2024

While the global IPO market has cooled significantly in the wake of the 2021 boom period, Goldman Sachs analysts have been more positive about the prospect of a return to form for European markets in 2024. 

“2022 and the first half of 2023 have seen a period of huge adjustments,” explained Clif Marriott, partner and co-head of European tech investment banking at Goldman Sachs. “But now those adjustments have largely played their way through, as inflation and interest rates have begun to taper in Europe, excluding potentially the UK.”

“People can see the end in sight of the rising interest rate cycle and with that comes more stability in the capital markets.”

With this in mind, the successful debut of Schott Pharma may yet become known as a watershed moment in Europe’s bid to recover from its ongoing IPO drought. 

While market conditions will play a significant role in the market’s recovery, the ability of pioneers like Schott to demonstrate a successful debut can pay dividends in empowering more CEOs and founders to recognize that the IPO market is once again positioning itself as an environment for ambitious firms to attain significant revenue. 

Although there’s a long way to go until we see the widespread optimism of the 2021 market conditions return for firms, every successful debut is a step in the right direction towards overcoming the ongoing uncertainty throughout European markets.