Shall we go to market?

Chris Price, investment specialist, discusses the recent listings on the London Stock Exchange.

According to PricewaterhouseCoopers, the third quarter of 2017 was the busiest third quarter for Initial Public Offerings (IPOs) in Europe since 2014. London was the most active exchange in the quarter with 27 IPOs, which raised €2.7bn, compared to 9 in the same quarter in 2016, raising €312m.

An IPO or a new issue is where companies sell their shares to the investing public before they trade on an exchange. The rationale for this can include paying down debt, business expansion or to finance other corporate activities. The cynical view may be that it is an exit for founders and venture capitalists.

The spate of new issues in the UK has been attributed to a degree of relative calm following the uncertainty caused by political events such as the Brexit decision and the general election result, which impacted the latter half of 2016 and the early part of this year. Post these events, there was a backlog of deals waiting to come to the market, so the supportive market environment has encouraged advisers and their clients to go ahead with their issues.

However, in the last weeks a few proposed deals have been pulled ahead of their planned flotation, leading some to question whether the ‘IPO window' is shutting. One or two of the companies who had planned to float cited market conditions as the reason behind not going ahead with their flotation. This seems slightly curious, given how major equity markets have performed and with equity capital issuance having been strong, with Dealogic quoting that over €35bn has been raised so far this year. Rather than the general appetite for IPOs receding, it is likely that in these instances it is company-specific issues, or trying to come to the market at too high a price, that has deterred would-be investors.

Ultimately, the success, or otherwise, of a new issue will depend on the quality of a company and the price it wants an investor to pay to become a shareholder. Deals coming in large quantities will force investors to be selective and the attitude to potential flotations may also be soured by previous issues that have setbacks fairly soon after starting trading on the market. These companies do not have a market track-record, so in these events their shares prices are, more often than not, hit very heavily. In Europe, a few recent flotations have now fallen below their issue price, and this weakness could convince short-term investors who are looking for quick profits, such as hedge funds, that appetite is waning, thereby leading them to ignore new deals put before them.

However, despite these hiccups, it is too early at the moment to say that the IPO opportunity has passed for those companies who wish to trade publicly. Those companies that are already engaged in the process may still want to continue, although they may have to temper their price expectations. Risks such as a tightening of monetary policy and the UK’s negotiations to exit the EU still have the ability to derail equity markets, which, in turn, could scupper the new issues markets. As one senior investment banker said: “There’s an urgency to strike while the iron is hot.” The pipeline remains strong but preparing for an IPO is expensive, which means it will feel even more expensive if the IPO is not successful. Therefore, for some companies a private sale will remain a preferred option.