IPOs are back as companies eye a window of opportunity
A surge in companies coming to the stock market would suggest there is a considerable improvement in investor confidence since the brutal sell-off in equities earlier this year.
It also helps that investors have been happy to back companies during the pandemic. It makes sense for other companies to now join the market and capitalise on investor appetite for share placings, as well as the recovery in markets generally.
Ultimately, the sudden influx of IPOs (initial public offerings) implies that companies and their advisers believe economic conditions are going to improve and that there is investor appetite to back good businesses.
There also seems to be a window of opportunity to complete listings before the US presidential election potentially troubles markets and Brexit trade talks become a major focal point.
THE BENEFIT OF NEW LISTINGS
The arrival of more companies to the market brings new ideas to investors and sometimes helps to broaden a pool of similar stocks, making it easier to do peer group comparisons on business activity and valuations.
For example, Calisen (CLSN) floated in February and is a rival to Smart Metering Systems (SMS:AIM) which has been on AIM since 2011. There is talk that Hipgnosis Songs Fund (SONG) could soon get a quoted rival in Round Hill Music, thereby providing investors with two different ways to invest in music royalties.
The forthcoming high-profile stock market listings of Ant Group, Palantir and Airbnb have all been on the cards for a long time. Their listings were simply delayed by the pandemic rather than the companies now suddenly deciding they want to be on the public markets.
TECH, HEALTHCARE AND ESG
While the volume of IPOs is picking up, it wouldn’t be a surprise if investors are still picky as to which ones they are going to back. The market has for several years shown a preference for high quality growth companies, rather than speculative blue-sky stories. Technology, healthcare and anything related to ESG issues are likely to fare better than ‘jam tomorrow’-type businesses, when it comes to getting a stock market listing away.
Among the names headed to the London market soon are Umuthi Healthcare, a distributor of pharmaceuticals and provider of medical facilities in remote areas, and investment trust Triple Point Energy Efficiency Infrastructure.
Many investors like to get involved at the offer price as history suggests IPOs are priced at a 10% to 20% discount to their intrinsic value, in order to incentivise people to back the company as it comes to market. Outside of investment trusts, IPO offers tend to be restricted to institutional investors and so retail investors often miss out if there is ‘pop’ in the share price as it starts trading for the first time.
Interestingly, the New York Stock Exchange has secured regulatory approval for a new way of listing stocks. Companies would issue new shares to the public via something called ‘primary direct floor listing’, using an opening auction that matches buy and sell orders to set the offer price on the day it lists.
That could potentially see stocks lose their IPO discount valuation as the auction could lead to more ‘appropriate’ pricing, says the Securities and Exchange Commission.