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The IPO sugar rush

After years of little activity, the IPO market has burst into life off the back of a surging equity bull run. But are these IPOs proving too frothy for fund managers?

Ten IPOs were launched in February alone, raising £2.6bn with a total market capitalisation of £6bn at issue. In the year to February, there were 12 IPOs which raised a total of over £2.7bn, according to data company Dealogic. 

In February 2013, only three IPOs were priced and raised £241m with a total market cap of £614m at issue. 

Upcoming IPOs – such as Pets at Home, Poundland and Just Eat – offer potentially exciting opportunities to fund managers but many have taken issue with the company valuations and the way in which certain information is revealed before flotation. 

Americanisation of IPOs

Artemis fund manager Tim Steer is highly critical of the UK IPO market and the way in which information is made available for fund managers who may be interested in investing.

Steer, who co-manages the £687m Artemis UK Growth fund, says: “The whole IPO process is in a terrible state. The IPO process in the UK has been Americanised.

“People are entitled to believe that fund managers who invest in IPOs have read the prospectus before they invest. I can tell you, they do not.

“On so many occasions, the prospectus comes out after the first day of dealings on the shares. That is why I do not go for them.”

Threadneedle Investments head of UK equities Simon Brazier is also sceptical of IPOs and believes many offer little value to investors.

Brazier, who manages the £1.6bn Threadneedle UK fund, says: “There are some interesting companies coming to the market.

“If they come with the right valuation we would be interested in investing in them.

“However in the wave of IPOs, a significant majority do not fulfil the long-term quality criteria we would need to see before investing. Within the flood of IPOs we are seeing, a significant majority will probably lose investors money.”

IPOs – February 2014 (Source: Dealogic)
Company Money raised Market Cap
Lenta £571m £2.6bn
AO World £487m £1.2bn
Summit Germany £28m £153m
Kennedy Wilson Europe Real Estate £931m £1.1bn
McColls  £133m £200m
DX Group £200m £200m
Atlantis £12m £72m
4D Pharma £17m £37m
Manx Telecom £156m £160m
Hurricane Energy £18m £272m

Smith & Williamson Investment Management fund manager Mark Boucher says some IPOs offer an investment opportunity but worries the excitement of a company going public can get people carried away.

Boucher, who co-manages the £46m Smith & Williamson Enterprise fund, says: “When companies come to market they can get caught up in valuation excitement.

“For example we looked at [appliance retailer] AO World but it was too expensive.

“Also, there is sometimes an uncertainty over what the ownership structure will look like of the company once it has floated.

“We think there is a problem in that companies show only research done by brokers, who will have a slight bias as they are involved so it is important to find third-party research.”

Unicorn Asset Management fund manager Simon Moon says he has found good value despite the hype, having bought into the recently floated logistics firm DX Group and alcoholic drinks company Conviviality Retail for the £615m Unicorn UK Income fund he co-manages.

Moon says: “The IPO market has heated up. The funds I work on have been more active on IPOs, and valuations have been sensible. The pipeline looks interesting. There are a couple more we are considering.”

Old Mutual Global Investors head of UK small and mid cap equities Dan Nickols is sceptical of the long-term opportunities arising from current IPOs and what happens after the much anticipated float.

Nickols says: “Ideally, an IPO syndicate and a company management team should seek to put together a well-spread list of supportive shareholders for the longer term. 

“Vendors of companies would be well-advised to consider not just maximising the short-term price they can achieve but also the building of a suitably spread shareholder register which will have the appetite and means to absorb more stock in the future as the investment case develops.”

But The Share Centre investment research analyst Helal Miah is more positive about this flurry of IPO activity than the period that preceded the dot com crash. 

Miah says: “This time we would be a bit more confident. Maybe prices are getting a bit frothy but not as bad as before.

“I also think the IPO process is a bit more sophisticated and there seems to be more caution.”

ADVISER VIEW 

Adrian-Lowcock-2012-700x450.jpg

Adrian Lowcock

Investors, and their adviser, need to do their due diligence. It is not great if you do not get a full prospectus in time as this only raises more questions, that is, what is this firm hiding? 

Adrian Lowcock is senior investment manager at Hargreaves Lansdown 

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