Goldman Sachs prides itself on its investment banking business, saying on its website that it “aspires to be the leading trusted adviser and financier” to its clients.
The US company is widely considered the most ruthless operator among the leading global investment banks – an ultra-competitive field in itself.
So there is always interest when deals that Goldman Sachs has been working on don’t go according to plan, as appears to have been the case over the past few weeks in a number of European stock market flotations.
The latest came on Friday night when the $3bn (£2bn) flotation of the German home delivery food business HelloFresh by Goldman Sachs and three other investment banks was postponed, as uncertain market conditions continued to play havoc with deals that might have got over the line in better times.
This follows another three companies advised by banks including Goldman Sachs who saw their shares fall on the first day of trading in the last few weeks. Flotations have become trickier to get right following the volatility in China’s stock market. Such has been the nervousness in European markets that around half of all flotations have been withdrawn since the start of September.
Flotations – or initial public offerings (IPOs) – involve private companies, often part- or near fully owned by private equity groups or funds, coming to the stock market to issue new shares so as to raise money and become publicly listed.
The companies depend on the likes of Goldman Sachs to determine a valuation of their equity and to sell that investment around the world to their clients or other potential purchasers, namely investing institutions, a mixture of pension funds, insurers and hedge funds. Several investment banks are often involved in underwriting and marketing individual IPOs, with one or more taking the lead role.
If the valuation they plump for is too low, the owners of the business can feel cheated, as some UK taxpayers did when the government sold the first tranche of shares in Royal Mail (a deal that Goldman Sachs and two other banks were involved in).
In that case, unions and others called on fees to the banks who advised the government on the price to be withheld amid claims that the UK taxpayer had lost hundreds of millions of pounds on the sale.
There are no hard and fast rules but broadly speaking most bankers in the IPO sector say they aim to issue shares which trade gently upwards on their first day of trading, to give the buyers the short-term boost they expect, and then to trade steadily upward thereafter.
Goldman Sachs raised some eyebrows for not following this path at last month’s London flotation of Hastings Group, a car insurer founded by the maverick entrepreneur Neil Utley.
In this case, Goldman Sachs was on both sides of the deal. One of its private equity funds owned a 50% stake in Hastings and was eyeing a sizeable return on its £350m investment, which it had made only two years before. A Goldman team of investment banking advisers as well as a team from Credit Suisse and Peel Hunt advised Hastings on how to sell its shares to new investors.
After the usual series of investor meetings, which took place against the background of gently deteriorating market conditions, a price range was launched at 180-220p a share. Ultimately this proved too high, even at the lower end, to attract enough demand.
The issue was very unusually relaunched at the end of the marketing process at below the price range in an effort to get the deal away. But even after the shares were issued at 170p, Hastings has struggled so far to be accepted by the stock market. After nearly a month, the shares were trading at about 160p on Monday, still below the issue price.
A fortnight later, also in London, Goldman advised on the flotation of Equiniti, the share registrar company. Equiniti’s stock was priced at the bottom end of its 165-200p range but even then was hit by a large hedge fund seller that made a large stock disposal minutes after the shares started trading. Shares traded down on the first day of dealings from the issue price of 165p to around 157.5p, although by Monday they had risen to about 170p.
The bank was also advising on the French flotation of an online women’s discount fashion chain, Showroomprive.com, whose shares dropped from €19.50 to €17.44 on the first day’s trading in Paris. The shares have recovered gently since then and are now just below the issue price at €19.30.
No one would say these three examples are anything more than a minor embarrassment for Goldman. They’re nowhere near the scale of some past IPO disasters – for instance, shares in Sports Direct, which was floated by Merrill Lynch and Citigroup, traded at just 50% of their issue price months after the retailer’s flotation in 2007. Goldman Sachs itself came in for extensive criticism after floating the online grocer Ocado in 2010. Its shares took six months to move above the issue price on flotation, amid much scepticism about the £1bn value attributed to the then loss-making group.
Goldman Sachs’ supporters argue that against an increasingly nervous market backdrop, weighed down by concerns over economic slowdown in China and fears of rising interest rates, it managed to get all three companies over the line.
Since September, a total of 15 planned flotations have been pulled across Europe, including Shield Therapeutics and Deezer, the French rival to Spotify. A further four deals, including Hastings, have had their deals repriced at the lower end of expectations, according to data from Dealogic.
Goldman Sachs has also recently advised on deals that have gone extremely well, such as Worldpay, the £4bn-plus payments processing group whose shares are now 18% ahead of the issue price at the time of last month’s float, and McCarthy & Stone, the retirement property group, whose shares began trading above their issue price on Friday.
“I think you have to look at things in the context of the current challenging IPO market,” said Dan Martin, who heads Goldman’s European equity syndicate. “The three IPOs in question all had difficult starts but are recovering, with Equiniti and Showroomprive close to or above issue price.”
Goldman says its performance on IPOs that have come to the market since early September has been better than the average, despite the experience of the trio in question, with shares in all the companies it has listed up by an average of 7%, compared with an average of 6% for the market as a whole.
In a still jittery market for new-issue companies, investment bankers will be squarely focused on the performance of the next Goldman Sachs deal.
This article was written by David Hellier, for theguardian.com on Monday 9th November 2015 17.35 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010