Following a period of high-profile listings, some at valuations that many found hard to justify, mutterings have been heard of an IPO bubble in London. In the same month that Zoopla, the property website, announced its intention to float, the fashion retailer Fat Face pulled its proposed flotation at the eleventh hour – citing challenging market conditions.
So, is it all downhill from here, or is the increased market activity of the past few months broadly sustainable?
The findings of the latest Small and Mid-Cap Sentiment Index Survey carried out by accountants BDO and the Quoted Companies Alliance give some insight into current market perception. Whilst 54 per cent of those surveyed concluded that IPO valuations were currently too high, an encouraging 69 per cent of quoted companies believed that investor interest in their company had increased in the past six months.
It was also good to see that 58 per cent of the quoted companies who participated in the survey believed that their listing was helping their company to grow; this figure was only 14 per cent in the September 2011 survey, when 60 per cent of respondents thought that being listed on an equity market was actually hindering their company’s growth.
It is perhaps understandable that some of the recent IPOs in London, including that of online takeaway firm Just Eat which was valued at an eye-watering £1.47 billion on listing, have caused eyebrows to be raised. Although Just Eat’s share price swiftly fell, and continues to trade below its listing price, those who argue that this shows that the upturn is unsustainable may yet be proved wrong.
More on IPO’s for fast-growth businesses:
- Robin Klein of Index Ventures on making IPOs easier
- Future Fifty member Green Man Gaming
- Dragons’ Den star sets out IPO route
While some balancing of a certain frothiness in the market in the first quarter was necessary and inevitable, we should not ignore the fact that, after a long period of depressed trading, market participants are ready for a period of sustained activity. Investor confidence can go a long way in underpinning the market and, provided the companies seeking to float are realistic about valuation and have solid management behind them, there is every reason to believe that quality IPOs will continue to find a receptive audience.
But, where are these investment opportunities to come from? One potential area for increased IPO activity is the AIM market of the London Stock Exchange, which has long appealed to growing international companies. After a very difficult few years, AIM seems to be finding its feet again.
Many of the smallest companies on the market have delisted, whether as a result of acquisition or in less happy circumstances, leaving the field to a group of higher quality companies with healthier market capitalisations. An obvious area for growth arises from AIM’s appeal to smaller US companies which are considering a public listing, but are increasingly unlikely to make a splash on NASDAQ. It is generally accepted that a company with a market capitalisation of less than $500 million will struggle to make a significant impression on that market.
By comparison, on AIM, where the average market capitalisation is in the region of $100 million, relatively smaller companies can get much more attention and are more likely to receive solid research coverage.
Another advantage of AIM for US companies is its lighter regulatory touch, which allows such companies to raise public money and carry out reasonably significant transactions without the need for onerous filings or too much red tape. By contrast, the regulatory burden on SEC reporting companies, including those listed on NASDAQ, is often disproportionate to their size and can be very costly.
And, of course, this need not be an ‘either or’ scenario: an AIM listing can offer smaller US companies the bridge they need to access public finance and cut their teeth on the public markets before seeking a dual listing on NASDAQ when they are of a size to do so.
With almost 50 US companies currently listed on AIM, covering a broad range of sectors, this is a reasonably well-trodden path already and potentially offers UK investors the chance to participate in international companies operating in a jurisdiction where cultural and linguistic barriers are generally low and corporate governance standards are typically high.