News Column

Shares: Sting in tale for investors in new flotations

August 9, 2014

Simon Goodley



When the big institutional investor BlackRock made headlines with a leaked letter to bankers this week, it was not just a matter for City insiders.

The group's European head of capital markets, Rob Leach, had bemoaned the way investors had been stung when buying shares in a string of newly floated companies that had then failed to perform as hoped.

Britain's pension funds are routinely invested into new initial public offerings (IPOs), so when Leach asked "why the first half [of the year] had been so poor" and "how this trajectory can be altered in the short timeframe leading up to the next raft of IPOs only a month away", he was partly talking about the savings of millions of ordinary people.

The email came as hedge funds have been increasingly placing bets that shares will fall in a number of recent private equity-backed listings, including high-profile businesses such as Pets at Home, which has lost about 24% since it floated, AO World (30%) and Just Eat (19%). That trio floated this year in a fanfare of high expectations, although AO World's lofty valuation in particular drew questioning commentary from some City observers.

Zoopla (up 9.1%) and Poundland (up 3.3%) have bucked the trend.

Joshua Raymond, chief market strategist at financial spread betting firm City Index, said: "The market has been swamped over the last year with IPOs, some of which have been fairly overpriced and rushed through to the market. On that basis, I think BlackRock's concerns are perfectly valid.

"I do think that one feature of swamping the market with IPOs is the fact investors have now become much more picky as to which companies they choose to invest in. This means firms have to work even harder to attract investment for any IPO to be deemed successful. On top of this, high profile failures such as Pets at Home has made investors more cautious.

"The temperature of the IPO market, certainly in London, has changed over the past six months and you are likely to see more IPOs delayed if issuers feel they are unlikely to succeed at the valuations they desire. That being said, investors are sitting on cash and happy to invest for the right opportunity as long as they are marketed properly."

According to stock market analysts Dealogic, 72 UK companies have floated around the world this year, while there have been 34 new listings on the London Stock Exchange. Of the top 20 listings in London, just under half are trading "under water", or below their offer price - although this is against the backdrop of the FTSE 100 losing around 3% this year, with the FTSE 250 shedding about 5%.

David Buik, market commentator at the City stockbroker Panmure Gordon, said: "Since the beginning of the year there have been 104 IPOs in the UK and Europe and 38 are under water. A lot of people say to you that's a very poor effort. But there are also a lot of people out there - and I was one of them - who predicted the FTSE would hit 7,000 this year. There's no chance of that.

"Nobody could have legislated for Putin, for China coming off the boil and for the slow start to the US economy. There was a lot of avarice and greed [but] I don't think that private equity have been doing anything wrong - they have been taking profit. However, it is now much tougher for them as they have squeezed the last bit of juice out of [the market]".

The complaint about private equity profiting at the expense of institutional investors may have some truth, but it is hardly as though this was ever a big secret. Earlier this year the question was widely posed whether the rush to float companies was a sign that private equity investors were sensing the markets had peaked. At the time Geoff Wilkinson, research associate at the City broker Linear Investments, said: "I think that's absolutely right. You've got the FTSE 100 and the S&P 500 around all-time highs, so both sides of the Atlantic have seen substantial capital gains."

Which raises another question. Is BlackRock now attempting to blame somebody else for itself having bought into these flotations and lost its clients' money? It won't comment further on the letter or say how its funds have done after investing in this year's floats, although a look at the performance of its main fund focused on London-listed companies - BlackRock UK - shows it is languishing in the fourth quartile of the fund management league.

Alastair McCaig, market analyst at trading firm IG, observed: "If there is an opportunity of deflecting criticism away from yourself, generally speaking the City does like to utilise those opportunities."

Also, City investors' suspicions have been raised that some of those managing the flotations have been looking at other ways in which to shift the odds in their favour. As one market commentator put it: "With the Saga float, a large proportion of the company's revenues are derived from insurance products. But it was categorised in general retailers, which made it easier for the shares to outperform its supposed competitors. The City thought that looked like quite a cheeky move to get it in a more comfortable league in which to perform in."

Still, the move hasn't seemed to have had much of an effect. Despite heavy marketing of the offer to Saga's customers, the shares are down more than 5% on their float price.

Captions:

Share price change since flotation


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Source: Guardian (UK)


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