THIS year has seen a tremendous number of new issues in the market. Since the start of 2014 there have been almost 50 in London, raising around £7 billion, and there is still a queue of companies waiting to follow suit. They have included well known names such as saga and last year the huge Royal Mail flotation. There are still companies waiting to float which are household names, including Zoopla , the property website, low cost airline Wizz Air and, of course, TsB.
The success of public offerings varies widely. Some have gone really well, some struggle to match their flotation price in the market afterwards and some have even pulled the plug before getting to the front of the queue. One of the most high-profile that falls into this category is Fatface, the clothing retailer which withdrew in the last few weeks from the flotation process. It is a process that has been going on for centuries and although the terminology may
have changed - these days a company comes to the market in an Initial Public Offering (IPO) - the mistakes made by investors remain remarkably similar.
One of the biggest disasters in stock market history in terms of new flotations was the south sea bubble of 1720, when eager investors bought shares in the south seas Company which had exclusive rights to trade in south America as granted by the King. Unfortunately this lucrative monopoly never came into being as war prevented the corporation from realising any meaningful profit and the share price collapsed. It is actually extremely difficult to assess IPOs these days. Persuasive prospectuses set out a seemingly airtight investment case, research ahead of the listing waxes lyrical about the excellent growth prospects; couple this with a good dose of financial jargon and it is remarkably hard to get to the real story. It is not an easy thing to get right and potential investors should do their homework. Things to think about include: Why is the company floating? What is the profit history? What is the debt level like? Are existing shareholders (often critical to the companies success) locked in to holding equity on an ongoing basis? is the balance sheet sound? Does it have a sensible dividend policy?
Forecasts can be wrong, so don't take them as gospel. The current spate of iPOs is partly a function of the financial crisis, which meant a dearth of activity causing a backlog, but there is also a strong feeling of momentum driving the rush to float: a successful flotation spawns many more. Contrary to what investors may believe, new companies are not necessarily the best investments, particularly on a long term basis. The smaller AIM (alternative investment market) market has less stringent requirements for flotation and the worrying statistic for longevity shows that in the second and third year after IPO there was a 25 per cent failure rate. In fact, UK IPOs tend to under-perform other quoted companies and the benchmark by as much as 10 to 50 per cent over three to five years.
There is therefore a real note of caution in this current market frenzy. Look at fundamentals and it can be dangerous to assume that every new company coming to the market will emulate Royal Mail.
* Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, which is a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.