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What new floats say about the market’s future direction
The plunge into bankruptcy of the Softbank-backed, self-styled ‘construction industry disruptor’ Katerra spares investors in US equities the decision over whether to buy into what would have doubtless been an eventual IPO (initial public offering).
Katerra had been given ‘Unicorn’ status – a valuation in excess of $1 billion – before it ran out of cash, so investors may have ducked one there, although another Softbank firm, WeWork, is still seeking a US listing, albeit via a deal with a SPAC (special purpose acquisition company), rather than the more traditional flotation route.
This stuff really matters. As John Brooks wrote in his book The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s: ‘If one fact is glaringly obvious in stock market history, it is that a new issues craze is the last stage of a dangerous boom.’
This is because sellers see their chance to cash out at inflated prices as buyers are lured in by rising markets and prevailing bullish sentiment.
The way in which multi-billion-dollar valuations at both WeWork and Katerra just melted away is perhaps confirmation of that warning and investors in UK equities might like to therefore keep a close eye on trends in the new listings market in London.
Hot and cold
The bad press surrounding the initial poor performance of both the Deliveroo (ROO) and Alphawave IP (AWE) flotations may suggest that the London market is far from overheating when it comes to new issues and that, as a result, such concerns may not be warranted.
If anything, the 43 IPOs to have taken place on the London Stock Exchange so far in 2021 appear to have struck a good balance. The average gain provided to those who were able to buy at the listing price is 24, although this column accepts the difficulties that private investors face in accessing IPOs is a major bugbear of many portfolio builders.
Nor does the amount of capital raised seem excessive, at £3.3 billion, according to data from the London Stock Exchange. This is the highest figure since 2015 but it pales compared to the £10 billion and £13 billion raised in the first five months of 2006 and 2007 respectively, after which trouble arrived in no uncertain terms, to again back up Brooks’ analysis of how the US equity boom of the 1960s came unstuck in the early 1970s.
The first five-month tally for 2021 also lags the boom of 2000 and 2001 as tech, media and telecom (TMT) companies rushed to list and sell stock to the unwary enthusiast.
Better still, the flow of secondary deals so far seems digestible, as companies whose shares are already listed have raised £9.5 billion in the year to date. It may be the highest figure since 2015 but again it lags the peaks of 2008-09 and 2000-02.
Even though share prices and valuations were collapsing, backers of technology firms were still willing sellers on the latter occasion because they knew the game was up. Perhaps therefore the real warning sign is not so much a rush of (potentially) dud IPOs but a string of secondary offerings that come regardless of how well – or badly - the IPO went.
Investors in Deliveroo and Alphawave IP should take particular note in this case, although this column was intrigued by commodities broker Marex Spectron’s decision to list on the London Stock Exchange. This could have been a good test of the current surge in commodity prices.
If anyone should know a good time to buy – or sell – it is surely a broker who is an expert in their field, so Marex’s move to give existing investors a chance to liquidate some of their investment now did look intriguing, given that the Bloomberg Commodity index is trading very close to its all-time highs of 2008 and 2011.
Investors – and thus would-be buyers of the stock – could have be forgiven for asking themselves whether the sellers may know anything they do not and, as Shares went to press, the IPO was quietly pulled.
The last big commodity trader who came to market in London was Glencore (GLEN). It did so in 2011 – barely a month after the Bloomberg Commodity index peaked that April at 513, a level to which it is yet to return.
The aggregate amount of money raised by IPOs and secondary placings in 2021 to date is £12.8 billion. Investors have received over £8 billion from share buybacks and some £30 billion in dividends. Bull markets tend to wither when the money runs out and it does not look like we are reaching that stage, at least just yet.