Why the UK IPO market is healthier than it looks

“The decision by Marex Spectron, Tungsten West and Elcogen to postpone their proposed stock market listings may be seen by some as a further sign that London is losing its lustre as a venue for up-and-coming firms, especially after the cool reception received by Deliveroo and Alphawave IP, but the picture may not be as black as it seems,” says AJ Bell Investment Director Russ Mould. “The average share price gain across the 40 or so firms that have made it to market this year is 23%, compared to the initial offering price. It can therefore be argued that investors are sifting through market newcomers in a very methodical manner, buying those that meet their governance, business model, financial performance and valuation criteria and spurning those that do not.

“And since – according to Warren Buffett – the first rule of investment is ‘Never lose money,’ with the second rule being ‘Never forget rule number one,’ that seems like a sensible policy. Avoiding losers is every bit as important as picking winners.

“Granted, it is still frustratingly difficult for private investors to get access to IPOs at the actual offer price and they are left scrambling to buy stock in good deals in the open market. As such, they will have not had a chance to accrue that average 24% capital gain. But at least professional money managers have been doing their job by protecting client funds and not piling into any old deal at any old price.

London IPOs in 2021 ranked by performance since listing

Source: London Stock Exchange, Refinitiv data

“The way in which multi-billion-dollar valuations at the American firms WeWork and Katerra just melted away, despite the powerful backing of Softbank, is a useful reminder of Buffett’s warning and how easy it can be to lose money if you pay the wrong price for the wrong firm at the wrong time. 

“Even good companies can be bad investments if you overpay.

“As John Brooks wrote in his book The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s, “If one fact is glaringly obvious in stock market history, it is that a new issues craze is the last stage of a dangerous boom.”

“This is because sellers see their chance to cash out at fat prices as buyers are lured in by rising markets and prevailing bullish sentiment. 

“But the disciplined way in which investors appear to be approaching proposed new listings in the UK suggests that the London market is far from overheating when it comes to new issues and that, as a result, such Brooks’ concerns not be warranted – at least for now.

“The average capital gain generated by London’s roster of IPOs to date in 2021 looks pleasing and nor does the amount of capital raised seem excessive, at £3.2 billion, according to data from the London Stock Exchange. 

“This is the highest figure since 2015 but it pales compared to the £10 billion and £13 billion raised in the first five months of 2006 and 2007 respectively, after which trouble arrived in no uncertain terms, to again back up Brooks’ analysis of how the US equity boom of the 1960s came unstuck in the early 1970s. 

“The first five-month tally for 2021 also lags the boom of 2000 and 2001 as tech, media and telecom (TMT) companies rushed to list and sell stock to the unwary enthusiast.

“Better still, the flow of secondary deals so far seems digestible, as companies whose shares are already listed have raised £9.5 billion in the year to date. It may be the highest figure since 2015 but again it lags the peaks of 2008-09 and 2000-02. “Even though share prices and valuations were collapsing, backers of TMT firms were still willing sellers during 2001-02 because they sensed the game was up. 

 
Source: London Stock Exchange

“Perhaps therefore the real warning sign is not so much a rush of (potentially) dud IPOs but a string of secondary offerings that come regardless of how well – or badly - the IPO went. 

“Again, the flow of secondary deals seems manageable for now, so it may not be to be too cynical, especially as money is flowing back to investors.

“The aggregate amount of money raised by IPOs and secondary placings in 2021 to date is £12.8 billion. Investors have received over £8 billion from share buybacks and some £30 billion in dividends. Bull markets tend to wither when the money runs out and it does not look like we are reaching that stage, at least just yet.”