Investors seeking returns from companies debuting on the stock market, known as initial public offerings, have endured a torrid time in recent years, with a range of high-profile companies coming to market and producing sharply declining share prices.
At the same time, there has been a cyclical decline in the quantity of new companies IPO’ing globally and, in the UK, a structural issue as domestically focused businesses choose to list in the US, as they anticipate being able to achieve a higher valuation in that market at a time when data shows consistent and persistent outflows from UK equity funds.
Tom Slater jointly runs the £10.9bn Scottish Mortgage investment trust, of which around 30 per cent is deployed in companies not yet quoted on any stock market.
He says there are two reasons why IPOs globally have been scarce in recent times.
Slater says many company owners are in no hurry to list their businesses as they believe being publicly listed comes with pressure to pursue a strategy that is more short termist in nature.
He adds that several companies in which he is invested may be inclined to pursue an IPO in the near term, but feel that “market conditions” have not been conducive to this, as equity markets generally have declined.
The types of companies in which Slater invests tend to be in areas such as technology and healthcare – businesses that are likely to earn the bulk of their returns in future.
Slater says that in a higher interest rate environment, investors are sympathetic to businesses that expect to earn their profits further into the future, because investors can lock in guaranteed returns on cash right now.
But he feels that with “mounting evidence” that interest rates have peaked in the developed world, investor sentiment may therefore shift back towards those types of growth companies.
Getting the home fires burning
But aside from global market conditions, there are uniquely UK reasons why there has been a dearth of companies listing on the FTSE, according to Jonathan Brown, who runs about £600mn of smaller company money at Invesco, including within the Invesco Perpetual UK Smaller Companies investment trust.
He says that UK investors “like to see a company that is making a profit and paying a dividend, or at least having the capacity to pay a dividend, rather than a company that may be pre-profit. The latter get a better reception in the US”.
But he notes there is a societal issue in the UK that may be deterring UK entrepreneurs from listing in the UK.
He says that in the UK “there is something of a social stigma around wealth”.
Gervais Williams, small-cap fund manager at Premier Miton, notes that many of the larger IPOs that have come to the market in the UK in recent years have been poor investments.
