Who are the winners and losers of the wave of new companies in the stock market?
While the UK stock market’s performance this year has been modest – up some nine percent – this hasn’t stopped small investors from pumping money into stocks and mutual funds.
Ridiculous savings rates and rising inflation have convinced many investors that they are much better off with assets that have a chance to outperform inflation, even if that return is not guaranteed.
The somewhat subdued stock market has also not stopped companies from deciding it is the right time to go public and list their companies on the London Stock Exchange, often crystallizing fortunes for founders and executives.
Making waves: So far this year, nearly 100 companies have gone public and issued shares through an IPO
So far this year, nearly 100 companies – from delivery company Deliveroo to DNA sequencing company Oxford Nanopore – have gone public and issued shares through an initial public offering (IPO) that can then be traded in London. It is the largest number of floats since 2014.
Good news? Yes, but there are concerns that some (not all) companies will enter the market at high prices, leaving early investors disappointed as the shares subsequently fall in price.
Dan Lane, senior analyst at stock trading Freetrade, says the IPO market has become ‘Jekyll and Hyde’ in nature – ‘with lower quality IPOs like Deliveroo jeopardizing the overall quality of the stock market’. “There is a danger that companies will rush to take advantage of a deluge of lockdown money,” he warns.
Mike Coombes works for PrimaryBid, which helps companies make their IPOs as friendly as possible to retail investors. PrimaryBid believes that retail investors should be able to buy shares in all IPOs at the listing price – and not have to wait for the shares to start trading before buying.
It’s a view that The Mail on Sunday supports through our Fair Play For Small Investors campaign.
While acknowledging that some IPOs this year have proved disappointing in terms of shareholder returns, he argues that a robust market for new equity issuance is to be welcomed. “More companies coming to our public market is great news for investors,” he says. Shares are liquid, transparent and well-regulated. Private investors can easily trade, ie buy shares in companies – old and new – and mutual funds.’
While he accepts that IPOs have a high risk-reward ratio because investors are in the dark, the performance figures are generally encouraging. PrimaryBid has examined the share price returns of 72 IPOs made this year via the London Stock Exchange – the main market or the Alternative Investment Market (AIM).
They were all at least £10 million in size – smaller ones have been ignored, as well as secondary listings (where a company is already listed elsewhere in the world). The return is based on the difference between the listing price and the closing price of the share last Thursday.
The table below shows the biggest ‘winners’ and ‘losers’, including a number of well-known names. Winners include FTSE100 cybersecurity firm Darktrace (stock price up 74 percent) and FTSE250 listed Auction Technology, an online auctioneer (up 150 percent).
Losers include furniture maker Made.com (down 31 percent) and delivery company Deliveroo (down 33 percent).
Across the 72 lists, PrimaryBid says the average return is 8.2 percent, slightly worse than the FTSE All Share’s return (9.1 percent) this year.
“Yes, given the dispersion in performance, the numbers show the high risk-return of IPOs,” added Coombes. “But I would argue that they are less risky than popular assets like cryptocurrencies that are able to advertise their wares with almost complete impunity.”
Russ Mold is an investment director at asset manager AJ Bell. He says it is good that more companies are looking for capital on the London Stock Exchange. But, like Freetrade’s Lane, he says investors shouldn’t get caught up in the hype that often accompanies new stock listings and ends up paying too much for their shares.
He says, “A new share issue should be analyzed and researched in exactly the same way as a company whose shares are already traded on the market. First, an investor must ensure that a new stock overcomes four hurdles: it fits their overall investment strategy and time horizon, while meeting their target investment return and risk appetite.”
If a stock doesn’t clear all four hurdles, Mold says an investor should “go ahead and fight any fear of missing out.” If it does solve them, an investor should do some homework about the company, looking at its business model and growth potential. Mold adds, “If they like what they see and think the stock is reasonably priced, then the new stock may be worth buying.”
WHY SMALL INVESTORS EARN ALSO
What experts unanimously agree on about new equity issues is that private investors should be able to buy shares on the same terms as big-city institutions. This is currently not happening which is why The Mail on Sunday is campaigning for ‘Fair Play For Small Investors’.
Currently, when most companies list shares on the London Stock Exchange, they offer them exclusively to institutional investors at an agreed price. As a result, retail investors can’t get their share of the action until trades in the stock begin. This often means paying more for their shares because many new issues trade at a hefty premium.
PrimaryBid believes that a portion of all new equity issues should be made available to retail investors. It states that retail investors are often treated as ‘second class citizens’.
Lee Wild, head of equity strategy at asset manager Interactive Investor, agrees. He says: “Retail investors have been stranded for too long in the wilderness of IPOs, often left to pick up the leftovers once city institutions have the whipped cream. But things are changing and retail investors can expect to participate on equal terms as pressure mounts on companies and their advisors to add a retail element to every listing.”
If you would like to support our Fair Play For Small Investors campaign, please register your support at publicinclusion.co.uk.
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