Rediscovering Europe’s Charms in IPO Market

Updated October 13, 2013, 4:31 p.m. ET

Rediscovering Europe’s Charms in IPO Market

JOHN JANNARONE

These days, investors seeking the boldest menu of initial public offerings need a taste for the Old World. After a dry spell in 2012, Europe’s IPO market has bounced back. Some $20 billion in deals have priced so far this year, almost triple the amount from the same period last year, according to Dealogic. While the U.S. still leads with almost $40 billion of new issues, that is virtually unchanged from a year earlier. Furthermore, this year’s European issues have made buyers happy, rising an average of 19% since listing. Some sought-after issues like the U.K.’s Royal MailRMG.LN +37.88% have been screamers: the stock jumped 38% on its first day of trading Friday.Why are European deals getting traction? A raft of private-equity-backed deals coming to market helps. For the last few years, most private-equity players looked to strategic buyers or rival funds for the highest prices. This year, 41% of European IPO volume has included companies backed by private equity, the highest percentage since at least 2000.

That suggests investors have grown comfortable with valuations in Europe, where stocks trade at a discount to their U.S. counterparts.

Perhaps more importantly, it signals a hope that economic recovery will push corporate profits higher. After all, investors tend to be skeptical of private-equity castoffs because their owners squeeze as much as possible out of companies before selling them.

Indeed, many of the largest European private-equity-backed IPOs have been in highly cyclical sectors, like property. German real-estate company Deutsche Annington Immobilien ANN.XE +1.37% sold $738 million of shares in July and U.K. residential broker Foxtons Group FOXT.LN +0.52% raised $690 million in September. Both have risen smartly.

Another reason: demand from U.S. investors playing catch-up. While they have been buyers of European stocks this year, their allocation to the region remains below historical levels, Goldman Sachs says.

And there’s reason some feel late to the party. Some highly cyclical stocks like U.K. television network ITV ITV.LN -0.05% and Italian broadcaster Mediaset SpAMS.MI -0.23% have soared in 2013 after years in the doldrums. IPOs can deliver returns quickly for laggards: European deals have averaged an 8.4% gain on their first day of trade this year.

Some U.S. investors may also look to Europe as a substitute for emerging markets, which have lately fallen out of favor.

Even with a healthy deal pipeline, like Italian luxury company Moncler, it isn’t clear there’s enough volume to satisfy investors.

Some U.S. hedge funds say they couldn’t get in on the Royal Mail IPO.

The chance for another crisis in the region is never far from investors’ minds. Barring that, though, there’s enough demand to keep European IPOs sizzling for a while.