David Prosser discusses the participation of retail investors and investment companies in IPOs.
It is nearly 40 years since the first of the privatisations of the 1980s encouraged investors to think IPOs offered an opportunity to make easy money. In the eighties, the “stags” subscribed for cheap shares in flotation after flotation and counted their profits as the price rose on day one of dealings.
The 25% collapse of Deliveroo stock on its recent debut on the London Stock Exchange is yet another reminder that IPOs don’t always work in the same way as those sell-offs of the family silver. The Financial Times reports that one of Deliveroo’s bankers has dubbed the flotation the “worst IPO in London’s history”, but high-profile new issues ranging from Ocado to Facebook have stuttered in recent years – even if they have gone on to perform well.
All of which begs a question. Should retail investors, often lacking an inside track on the business, take part in these IPOs at all? Buying new issues has always been something of a speculative endeavour, sitting uncomfortably with advice to invest for the long term. And the Deliveroo IPO shows just how risky these deals can be.
Moreover, there is another way to get exposure to these businesses, or to take a considered decision to steer clear of them where that is preferable. This, after all, is what we pay professional fund managers to think about.
Investors in Scottish Mortgage, the top-performing investment company, understand this point. The fund has invested in some of the biggest technology business IPOs of recent years and netted handsome returns over time. Equally, it has sometimes chosen to steer clear. In recent weeks, manager James Anderson has made no secret of the fact that he is far from convinced about Deliveroo’s business model.
Anderson is not the only one counting his blessings in the wake of the Deliveroo flop. Fund managers including Aberdeen Standard, BMO and Rathbones all let it be known they would be steering clear of the IPO.
Elsewhere in the investment companies industry, there is another group of people who know a bit about the IPO market. Listed private equity fund managers have exposure to many of these businesses well before they consider listing on the stock market.
Indeed, private equity investment offers a solution to those investors who worry about another contradiction of backing IPOs: by the time that a company is ready to list on a stock exchange, its most explosive period of growth may be behind it; the founders may even be cashing in on that basis. In which case, investors may be coming to the party too late.
A private equity fund, by contrast, takes stakes in companies at an earlier stage in their trajectory. There may, of course, be misses; some investee businesses will inevitably fail to take off. But the hits often offer much greater returns than an investor could hope for from a listed company.
None of which is to say investors should never put money into IPOs. But it is certainly important to maintain a sense of realism; buying shares at issue is always something of a leap into the unknown. If you want someone to hold your hand – or provide a parachute – a collective fund such as an investment company might well be the better option.