Record year for IPOs hints at future market conservatism

James Lyons, partner at Ashfords, looks back on recent London flotations and explains what kind of impact this may have for future listings.

So far, 2014 has seen a flurry of flotations across the UK markets – with the highest level of listings since 2007. Since the recession, businesses have been waiting patiently to raise capital, and the favourable market conditions in the first half of 2014 have led to what has been described by Justin Cooper of Capita Asset Services as a ‘gold rush’.

Research published recently by Capita Asset Services has indicated that IPOs across the UK’s main market and AIM are set to more than double the £8.3 billion raised in 2013, expected to reach £18.5 billion by the end of the year. In the six months to June 2014, the total funds raised by the AIM market increased by 161 per cent on the previous year, according to figures published by the London Stock Exchange.

Reflecting a healthier market, some of the biggest flotations this year include AA (£1.35 billion), Saga (£550 million), Pets at Home (£464 million), Poundland (£375 million), Zoopla (£352 million), AO World (£423 million) and Just Eat. A number of companies have performed exceptionally well, with shares in Game Digital having risen by 41 per cent and Zoopla and Just Eat showing decent rises.

Consumer facing companies have dominated the market, reflecting the fact that UK spending has picked up significantly. Over fifty per cent of the IPO money raised, and one in three main market companies, are consumer goods and services companies.

However, caution should be exercised. Some large flotations have underperformed, most notably online white goods retailer AO World whose shares (at the time of writing) are 32 per cent below the 285p issue price, and Pets at Home whose shares (at the time of writing) are trading at 173p, well below the issue price of 245p.

At flotation Saga, a holiday and insurance company for the over-50s, was forced to price its shares at the bottom of its price range and still dropped after listing. Saga has been publicly criticised for its high valuation and for not positioning itself in the insurance sector, but as consumer stock. The underperformances in 2014 have led some investors and commentators to assert that IPOs are often being overvalued at flotation, especially in the online and technology sectors.

Furthermore, fear of market saturation has led some companies to withdraw from the field; Wizz Air abandoned a planned £200 million listing, and Fat Face a £110 million flotation.

Despite such caution, and the usual lull over the summer months extended somewhat in 2014 whilst investors and companies awaited the outcome of the Scottish vote for independence in September, the considerable pipeline of companies gearing up to come to the market reinforces Capita’s view that there could be a very strong finish to 2014. Aldermore, Miller Homes, RAC, the British Car Association and Jimmy Choo have all recently announced intentions to float.

Nevertheless, the latter half of 2014 will no doubt be more challenging for companies coming to the market as fund managers will be more cautious and discerning, given the number of IPOs that have failed to meet expectations in the first half of the year and with the risk of over-saturation. Deals will certainly get done but some companies will undoubtedly have to accept lower valuations and investors may be able to exert more leverage on price than at the start of this year.

Capita Asset Services’ research highlights that over the last ten years new listings have outperformed the FTSE All Share Index by 7 per cent on average. This has not been the case in 2014 so far. Capita puts this down to a lack of bull market and thin supply of share issues which usually drives strong initial performance. However, the future of UK IPOs remains bright for companies, both in the UK and overseas, coming to the market with reasonable valuations and robust business propositions which should see a return to trend and increased investor confidence over the long term.

Hunter Ruthven

Hunter Ruthven

Hunter was the Editor for from 2012 to 2014, before moving on to Caspian Media Ltd to be Editor of Real Business.

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