As the dust settles on the frenzied IPOs of Royal Mail in the UK and Twitter in the US, Rebecca Jones asks fund managers how to spot a hit.
Neil Veitch, manager, SVM UK Opportunities fund
You have to look at the context in which a company is coming to market. For example, the driving force behind Royal Mail’s IPO was ideological; the government wanted to emphasise its belief in the power of the market. The shares were always going to fly because they were always going to be priced to.
On the other side of the equation, you get some IPOs where the vendors are less incentivised to provide returns for investors, as opposed to maximising their own. That tends to translate into projections at IPO that can be unrealistic.
In Twitter’s case, only 13% of the company was listed, so is the public price in any way representative of the true underlying value? I would question that. I would say it was more reflective of a manufactured situation and it is not surprising that the share price has drifted back.
After Royal Mail and Twitter, when should investors target IPOs?
So, you have to question the reasons behind the listing, who the vendors are and what that may mean for future market performance. There is no hard and fast rule but I think, as with most things in investment, it pays to be cynical.
You can have businesses with reasonably short track records, but where the market opportunity is significant, do very well and, conversely, you can have businesses with a long track record of stability but whose business model is not as defensible as investors think.
The IPO pipeline is quite backed up but it is probably true to say that the better stuff gets away early. As the cycle is prolonged, the lower quality businesses come to the fore. Investors should also be mindful that a pick-up in IPO activity tends to happen near the end of a bull market, rather than the beginning.
George Godber, manager, Miton UK Value Opportunities fund
In terms of current IPO issuance, we are back up to 2007 levels, which is not a terribly good indicator for the market. That said, you can get some fabulous bargains, such as Royal Mail, which is a good cash generative business that came at a very attractive valuation.
However, I have seen a few IPOs that were far too expensive and did not represent good risk rewards. The froth in the market has driven up the price of IPOs. When you see issues being ten times over-subscribed, as was the case with Royal Mail, it just pushes up the price of the next one.
This article continues…
Scam victims lost average £91,000
Stepped down following MBO
Helped by rising oil price
Seven female CEOs
Duo start roles on 1 October