2014 is set to be one of the busiest years for UK IPO activity since the financial crisis in 2007. Already we’ve had in excess of 50 new listings, and analysts predict a further 20-30 before the end of the year. While the first half of the year was largely successful for floats, recent valuations and poor performance in secondary market trading signals that perhaps the tide is changing. Investors are likely to be more selective in which IPOs they subscribe to for the rest of the year and as such firms will need to do more to drum up interest and convince investors of their credibility.
Back in May, the fashion retailer Fat Face realized that market conditions were changing and opted to abandon their plans to list. At the same time Saga Group slashed its offer price from 185-245p to 185-205p; later pricing them at the bottom end of the scale at just 185p. Despite the low listing price, the shares failed prosper on the first day of trading and closed down 0.5p at 184.5p. Typically, successful IPOs finish up 5-10% on the first day’s trading; investors want to be rewarded for parting with their cash. It’s no surprise then that investors are becoming increasingly concerned, even citing Saga’s IPO as one that has killed the market for future listings.
That may be a bit over dramatic. The IPO market was already showing signs of stress, evident in Fat Face’s withdrawal. In fact, of all the UK IPOs this year, only Poundland still remains above its listing price. When equity markets are rising, it becomes more and more attractive for firms to list and as such we’ve seen a rise in the quantity of IPOs but not necessarily quality. It has thus become a laborious process for investors of sifting the wheat from the chaff. Ultimately it comes down to fair valuations and whether there is the potential for capital gains. Investment banks broker the deals and are responsible for valuing the firm and marketing the IPO to investors. However, it’s important to remember that in brokering a deal, conflicts of interest will arise. The firm will desire a high valuation so as to increase the amount of capital raised, but too high and it becomes difficult to market.
On the other hand, a low valuation will attract investors, but the owners disposing of the firm’s stock will be less than impressed at the loss of funds raised. Investment banks must produce a valuation which is fair and attractive to both the issuing firm as well as subscribers, although in reality it’s not uncommon for valuations to be swayed in one side’s favour. While there are those who feel disadvantaged by the poor performance of recent IPOs, the hard truth is that they have no one to blame but themselves. Simply put, they paid too much. Just because the issuing firm has been valued at a certain market capitalization doesn’t mean one should subscribe to that belief.
In today’s market, due diligence is key. There’s no guarantee the share price will jump on the first day’s trading so it’s necessary to work harder for that return. Research the company, the management, the industry, and of course the prospectus. Draw conclusions, assign a value and ultimately make a decision with conviction. Spread bets and CFDs are leveraged products. Spread betting and CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.Learn more about online spread betting with IG.
Always remember that spread bets and CFDs are leveraged products. Spread betting and CFD trading may not be suitable for everyone and can result in losses that exceed your deposits, so please ensure that you fully understand the risks involved.