Investment trusts eye IPO recovery

Last year did see a small uptick in new issues, and measures to support London now appear to be having a positive effect. These include regulatory changes to simplify the listing process, a three-year stamp duty holiday on new listings, and a concerted effort by the London Stock Exchange to court IPO candidates in the UK and from overseas.

There’s also a more basic reason to expect heightened IPO activity: simply that the drought means there is a backlog of companies waiting to list. These companies have stayed on the sidelines amid concerns around geopolitical volatility, higher interest rates and valuation uncertainty.

Some of those anxieties have started to dissipate, but companies can’t afford to wait forever. Many are under pressure from early-stage investors to offer an exit route, while others need to raise new funds.

How might an IPO recovery impact the investment trust sector? Kepler’s analysis outlines three potentially positive outcomes.

First, reversing the decline in the number of listed companies on the UK market would “refresh the opportunity set” for trusts that invest predominantly in the UK, Kepler points out.

Funds have been starved of new opportunities in recent years, while many of the UK’s best companies have been bought out via M&A activity, often with private equity buyers taking them off the market altogether.

A second positive could be to drive renewed interest in the UK stock market from global investors, who have largely looked elsewhere in recent times. Despite a strong year of share price performance from parts of the UK market last year, UK stocks remain undervalued in comparison to their counterparts in most other Western markets. But if IPO activity prompts greater positivity about UK equities, there is scope to catch up, again to the benefit of UK-focused investment trusts.

Kepler’s third point is that IPO activity often draws attention to the potential of small and mid cap stocks – since most IPOs fall into this category. This area of the market has found the going particularly tough – missing out on many of last year’s gains – to the detriment of investment trusts specialising in small and mid caps. Might they now be due a rebound?

It’s also worth offering a fourth positive for investment trusts, not put forward by Kepler but interesting nonetheless. Many investment trusts are invested in the privately-owned companies that may now be able to IPO at last. Across the Growth Capital, Private Equity and VCT sectors, multiple funds may be set for uplifts as portfolio constituents come to market this year.

Indeed, even speculation about increased IPO activity represents a tailwind. Shares in many of these investment trusts currently trade at historically wide discounts to the value of their underlying assets. That reflects a relatively downbeat assessment of this part of the market by investors; now, sentiment may be shifting.

There can be no guarantees. There are plenty of challenges that could derail an IPO recovery – not least the unpredictability of the political interventions of the US president, who has regularly plunged markets into chaos over the past 12 months. Still, let’s be hopeful. Finally, as Lord Kitchener actually put it, it may be that “London is the place for me”.