In financial markets, as in life, the line between ambition and delusion is often perilously thin. The recent IPO of liquid natural gas exporter Venture Global is a textbook example of how even the most promising prospects can unravel when investor scepticism clashes with sky-high valuation ambitions. What started as a confident march, fuelled by Trump-era energy optimism and the allure of a booming LNG export market, swiftly turned into a cautionary tale, courtesy of the equity capital markets.
The stars had seemed aligned. US equity markets have been on a tear. The incoming administration has vigorously promoted natural gas and promised to rescind the Department of Energy’s pause on LNG exports. Against this positive backdrop, Venture Global aimed for the stratosphere, setting a valuation range for a $2.3bn IPO at $40-$46 per share — implying a fully diluted market cap of $125bn.
But even in this bulled-up era, markets don’t run on pixie dust alone. Investors balked at the company’s assumptions, starting with its valuation of future cash flows from five LNG terminals — of which only one is operational and another is nearing completion. Fund managers also pushed back on assumptions of a $6 per million British thermal unit spread on LNG sales, noting much of the output hadn’t yet been contracted. A mere 1.9 per cent free float also left many potential buyers concerned. And then there was the legal quagmire: multibillion-dollar arbitration claims from BP, Shell, and others, alleging that Venture Global had reneged on its contractual obligations by selling LNG on the spot market.
Despite pressure from the underwriters, investors held firm: in their view, Venture Global could not justify an over 30 per cent premium on a forward EV/ebitda basis compared to its more established peer, Cheniere Energy, which many of the targeted fund managers know well and already own. Even in hot markets, investors expect an IPO discount.
Faced with mounting concerns, the IPO was dramatically reworked, with its valuation slashed by a jaw-dropping 42 per cent. The shares priced at $25, at the midpoint of a revised $23-27 range, raising $1.75bn. This amounted to a humbling climbdown, exposing the chasm between boardroom bravado and unforgiving market judgments.
How did the bankers and management get the terms so wrong? In fact, these kinds of misjudgments aren’t all that uncommon — and they’re not that easy to avoid!
One possible culprit is the investment banking ecosystem. Banks operate in a world where success is measured in mandates secured and fees earned. Winning an IPO pitch often hinges on presenting the most compelling (read: optimistic) valuation. In the world of equity capital markets, the mantra might as well be: “Pitch in poetry, execute in prose.” When courting clients, bankers float punchy numbers with just enough plausibility to preserve credibility.
A lower valuation might be more realistic, but it won’t win you the mandate. Every equity capital markets banker — and I mean every — can tell a plaintive story about losing a big IPO pitch because the mooted valuation in the presentation deck was below those of other banks. Of course, no client tells a spurned bank that their numbers were too conservative; the euphemisms are always about “misunderstanding the story” or failing to grasp “growth potential.” But you get the point.
Venture Global’s leadership may have played its part too. In my experience, founders and executives at companies like these are often charismatic, visionary risk-takers — people who’ve thrived by zigging when others zagged. Their confidence, the very quality that fuels their success, can also make them resistant to advice that feels like a brake on their momentum. Telling phenomenally successful entrepreneurs that their brainchild is worth less than they think is not for the faint of heart. It’s also possible the banks, under pressure to keep the client happy, didn’t push back hard enough on the company’s valuation expectations. I’ve seen this happen time and again.
All that said, one common reason for an IPO re-pricing or withdrawal is not present here. Sometimes the stock market falls during the marketing process, rendering what seemed like a reasonable price range suddenly untenable. But that wasn’t the case here. If anything, the Trump-era enthusiasm created a frothy environment. Yet investors still have their limits. Venture Global discovered, the hard way, that not every story — no matter how aligned with the Zeitgeist — commands a premium price.
So what’s the big deal about repricing an IPO? After all, isn’t price discovery part of the process? Technically, yes. But the cost is still significant. A downward repricing isn’t just a financial adjustment; it’s a psychological blow. Momentum shifts. The narrative evolves from “hot-ticket” to “let’s wait and see.” The company loses pricing leverage, while investors take the upper hand. Indeed, two large fund managers told me on Friday they would have participated at $27-30 per share, whereas the offering ended up pricing at $25.
So for Venture Global, the fallout extends beyond wounded pride and temporary embarrassment. Raising capital under less favourable terms is a tangible setback.
The stock stumbled out of the gate, closing down 4 per cent on Friday at $24. While no one can say for certain, it’s worth asking whether a lower initial price range might have avoided a rocky start. The repricing cast a shadow over the deal’s dynamics, and the flagrantly unrealistic nature of the first price range — coupled with an aggressive campaign to convince investors that other fund managers supported it (“Gaslighting at its finest,” one investor told MainFT) — may have sown doubts about other management claims that might otherwise have been accepted at face value. With strong market tailwinds, this offering had the potential to be a blockbuster; instead, Venture Global’s market debut landed with the grace and buoyancy of a deflated balloon.
However, not all is lost. Cutting an IPO price range is sometimes just a hiccup; some companies have weathered the experience and thrived. Google famously priced its 2004 IPO at $85 after starting with a $108-135 range, and the rest, as they say, is history.
More generally, markets have a way of recalibrating, and Venture Global’s IPO offers a nuanced lesson. It’s a reminder that valuations aren’t fixed by management or banker decree, but rather hammered out in the back-and-forth with investors.
The key takeaway from Venture Global’s market debut is clear: investors are willing to pay a premium valuation, but only if the financials justify it today — not based on the hope that the company might enter a higher-growth phase two or three years down the line.
Even in these optimistic markets, there’s a boundary between visionary thinking and valuation credibility. Venture Global’s down-priced, downsized offering is not a negative omen for the IPO market, but a reality check at a time of market excess elsewhere.
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