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Europe's IPO hopefuls face investor caution over quality, price

LONDON (Reuters) - Europe is on course for its busiest start to the year for initial public offerings since 2015 but a jump in stock market volatility and a few IPO flops have made investors more discerning of where they put their cash.

FILE PHOTO - Siemens Healthineers headquarters is pictured in Erlangen near Nuremberg, Germany, October 7, 2016. REUTERS/Michaela Rehle

Ten IPOs have already hit stock markets in Europe, the Middle East and Africa in 2018, raising $2.6 billion, an increase on the $1.2 billion raised in the same period a year earlier as deal sizes have increased, Thomson Reuters data showed.

A string of listings is expected to follow in the coming quarters. But in a sign of investor nervousness, Siemens' SIEGn.DE healthcare business - expected to be the biggest European IPO this year and one of Germany's biggest listings of the past decade - set a price range on Sunday which valued the company at a smaller than expected 31 billion euros ($38.13 billion).

“Investors are pushing back against aggressive valuations and showing much more price sensitivity because they are fed up with poor IPO after-market performance,” a senior banker, who did not want to be named, said.

This growing price sensitivity follows the burst of financial market volatility in January and February in which major stock markets - including the Euro STOXX 50 .STOXX50E - fell 10 percent within a few days, fueled by inflation fears and expectations that interest rates could rise more quickly.

“The number of potential IPOs has basically accelerated, again. There’s a lot in the pipeline,” Ed Meier, fund manager at Old Mutual Global Investors, said.

“But I think it’s fair to say that, given where we are in the (economic) cycle, the amount of potential outcomes in (company) forecasts, and the potential for those forecasts to be wrong, is much higher than it was.”

When deciding whether to invest in an IPO, fund managers assess a company’s growth forecasts in its IPO prospectus. These form the basis for its valuation or price tag. If the outlook for economic growth turns downwards, these growth forecasts will be at risk.

Global investors cut their equity exposure to a three-month low after stock markets fell sharply early in February.

But the IPO pipeline remains fully stocked with companies lining up to take advantage of still attractive stock market valuations.

In Germany, Deutsche Bank DBKGn.DE is set to come to market in March with a listing of its funds arm, which sources have said could raise up to 2 billion euros.

On the London Stock Exchange there are a number of companies aiming to list, which could help the exchange sustain last year’s strong recovery in IPO volumes after a slump in 2016 partly due to Britain’s vote to leave the European Union.

Private equity-backed tech firm Avast, online betting company SkyBet and education firm GEMs are lining up to list in London in the second or third quarters..

But companies’ ability to raise their target amounts of money is set to get tougher.

“Money will get tighter ... there are some things that are going to be markedly more difficult to do,” Adam Young, global head of equity advisory at Rothschild, said.

Nick Burchett, head of UK equities at Cavendish Asset Management, said among London listings to go well last year was insurer Sabre SBRE.L, whose shares rose 10 percent on its December market debut. But he also said that for every one that worked a number failed the fund manager's quality test.

“We’ve seen a few over the last few months where we’ve looked at them and thought... some of the valuations are a little bit rich. Is it the advisers that are just saying ‘we can get it away for this. There’s a bit of money sloshing around in the system’?”

The risk of over-paying has been highlighted by several high-profile IPO flops, including Austrian bank Bawag BAWG.VI, the country's biggest ever listing, which fell in value on its first trading day. Bawag's shares are currently trading at around 44 euros, still below the 48 euro IPO price.

Another to underwhelm was Angry Birds maker Rovio ROVIO.HE, which issued a profit warning just months after its IPO in September, leaving investors nursing big losses.

Young from Rothshild said: “Poor post-IPO after markets sometimes occur because sellers have over-ambitious valuation targets and push offer prices beyond the levels which the highest quality investors wish to support.”

“And sometimes IPOs are the victims of genuine bad luck and the side-effects of other issuers’ mistakes,” Young added.

Whether 2018 becomes a record year for IPOs could depend in large part on where and if Saudi Arabia decides to list part of its national oil company, Saudi Aramco IPO-ARMO.SE, itself the subject of fierce debate among investors about its price tag.

Additional reporting by Ben Martin in London and Arno Schuetze in Frankfurt. Editing by Jane Merriman