The problem with IPOs in 2018
A long bull market has failed to bring the number and scale of initial public offerings back to anything like the scale of activity before the global financial crisis, as Angus McCrone reports.
Sometimes the exception proves the rule. Take flotations on the UK stock market: October’s sale by sports car maker Aston Martin Lagonda of £1.1bn of shares in a listing reminded the City that interesting new issues used to come thick and fast, and now do so only rarely.
In recent times, the flow of initial public offerings (IPOs) in London has slowed to a trickle. In the first eight months of 2018, there were 99 new issues on the Stock Exchange’s Main Market and on the Alternative Investment Market (AIM), raising a total of £3.6bn of new money.
Most of these new issues were tiny, the biggest being the easily missed IPO raising £330m by Energean Oil Gas, an exploration and production company active in the eastern Mediterranean.
Even with Aston Martin, which did not raise any new money, and Funding Circle, which floated the same week raising £300m, this year’s total is likely to finish well on the low side, compared to the annual average since the beginning of this century.
In that time, there have been 4,782 new issues in London, raising £219bn, equivalent to an average £11.5bn per year. AIM has accounted for two thirds of the issues since 2000, but only a fifth of the total raised.
Given the ultra-frosty relations between London and Moscow, it is not surprising this source has dried up
More revealing may be to compare 2018 with other years deep into a bull market, when investor confidence and valuations were also high. On that basis, this year looks particularly feeble.
By comparison, the year 2000 saw 487 new issues, raising £18.7bn, led by China Petroleum Chemical at £2.4bn and Granada Media at £1.5bn; and in 2007 there were 410 issues totalling £27.1bn, led by VTB Bank at £3.2bn and Eurasian Natural Resources at £1.5bn.
What is the problem with London IPOs in 2018?
One thing to note is that this is not the only recent weak year for flotations – 2017 was higher, at £9.7bn, but 2016 ended up at only £4.7bn. The last year to beat the 2000-17 average was 2014, when the AA and Royal Mail both debuted.
The FTSE 100 index has risen by 1,000 points since the start of 2015, so why the weak trend? Everyone’s favourite whipping boy, Brexit, will not have helped, given the all-pervading uncertainty just now over the UK economy and the value of its currency.
But there are also some specific influences. Russian companies were big features of the IPO scene in London at various times in the last decade and a half, but given the ultra-frosty relations between London and Moscow following the Skripal poisoning, and also the travails of the Russian economy under sanctions, it is not surprising that this source has dried up.
Hydrocarbon and mining companies have also driven flotations in London this century, one of the biggest examples being Glencore’s raising of £6.2bn in 2011.
However, the oil price plunge in 2014-15 cooled interest, as has the unfolding low-carbon transition. This year’s recovery in oil and coal prices might, in time, change the mood again.
From the point of view of UK companies, an IPO is far from the only investor exit option these days.
Flotations may also be rather out of fashion. On the stock market investor side, there is caution about the valuations that are set by floating companies and their advisers.
Royal Mail was a rare example of a stock in London that roared to a premium. It was little surprise to see shares in both Aston Martin and Funding Circle fall in the immediate aftermath of their IPOs in October.
And, from the point of view of UK companies, an IPO is far from the only investor exit option these days. Being a quoted firm involves a burden of reporting and regulatory requirements. Alternatives are private equity buy-outs, or being acquired by an international giant.
In the IT and internet arenas, the latter is a particularly obvious option, given the presence of huge and deep-pocketed US corporations (Apple, for instance, was capitalised at $1.1 trillion in late September, and Amazon at $963bn). They can buy whatever upstart firms they see that have interesting technology.
There is a troubling question. Is the UK building the next generation of leading London-listed quoted companies in new and existing industries? The entrepreneurial drive seems to be there, among private start-ups and on AIM, but do they have the staying power?