Disastrous Deliveroo float continues to haunt the IPO market one year on

Moonpig, Wise and Darktrace have seen their shares skid after listing to much fanfare

It’s been one year since Deliveroo’s disastrous IPO. When it went public at the end of March 2021, the company had sold shares at 390p-a-piece, with Deliveroo valued at around £7.6bn.

Less than a month later Deliveroo hit 224p and it has continued to slide – now sitting around the 120p mark.

Many institutional investors at the time of the IPO expressed concerns about Deliveroo’s persistent losses and governance structure, especially the fact company founder Will Shu would maintain control of the business even after flotation.

Shu’s continued control of the business via a dual-class share structure meant the company could not be included in any FTSE indexes. As a result, ETFs and other passive investment vehicles did not buy the stock.

Major investors including Aviva, Aberdeen Standard, L&G and M&G made it clear at flotation they would not be investing, which dampened wider investor interest in Deliveroo.

Struggling IPOs amid excessive valuations

Of course, Deliveroo was just one of many tech/e-commerce IPOs last year and by no means the only one to struggle after listing.

Moonpig, Lendinvest, Made.com, Trustpilot, Dr Martens have all seen their share price under pressure after their high-profile flotations.

Susannah Streeter (pictured), senior markets and investment analyst at Hargreaves Lansdown, believes a combination of insecurity among investors and lack of access have played their part in making life hard for IPOs.

She points out that London has been working hard to position itself as a fintech hub, as the UK continues to grapple with its post-Brexit status, following an era when it has struggled to attract fast growing companies to launch an IPO.

It has had some success, with data from the London Stock Exchange indicating that the City made significant progress luring IPOs in, raising more equity capital for newly listing businesses in 2021 than any time since 2007.

With £16.8bn raised, up from £9.4bn in 2020, it made London the biggest single source of capital outside the US and China, more than that raised by Amsterdam and Paris combined.

However, Streeter says it’s not all been plain sailing and although the government has begun to make changes to try and make the City more attractive to founder-led firms, it seems these alone aren’t cutting it just yet –  particularly given the climate of nervousness since the start of the year.

“It has not helped that newly listed ‘tech’ companies have had a distinctly rocky ride over the past year. Deliveroo’s disastrous IPO did little to inspire optimism, Moonpig has been brought down to earth with a bump and although payments firm Wise got off to a running start with its direct listing, its shares have been on a distinct downwards trajectory since the autumn. Cyber security Darktrace has also been hit by a fresh jolt of insecurity among investors.”

Unrealistic expectations

Rathbone Investment Management’s head of equities, Sanjiv Tumkur, describes technology as “an overall winner from the pandemic” which meant “the valuations and expectations for many of the IPOs in this area in 2021 were excessive”.

He adds: “2021 saw inflationary pressures build which caused interest rate expectations to rise, which in turn put pressure on technology company valuations, where discounted cash flows are sensitive to the discount rate used to value future years’ profits.

“Many of the 2021 IPOs were unprofitable and relied on strong growth to deliver the prospect of future profits, so these businesses had the most ‘hope’ in their IPO valuations and, therefore, were the most vulnerable to rising discount rates as well as to any downgrades to future profit expectations. Private equity stock overhangs being sold down further absorbed potential investor demand.”

Issuers exploited unprecedented momentum to place overvalued IPOs

Tancredi Cordero, chief executive of Kuros Associates, believes the pricing by issuers was always going to create problems – and that, he says, is exactly what has happened.

“During the course of 2020 and 2021, at major investment banks, most equity capital markets (ECM) and brokerage departments have exploited an unprecedented momentum and investors’ greed to place overvalued IPOs. It is no surprise that a year or so later most of these speculative initial public offerings are down over 50% of their initial value.”

However, he adds: “There are some positive exceptions that stacked the deck quite consistently, the likes Dutch Bros, Xpotential and Apria to name a few. Such names have thrived far beyond expectations, but their performance must be attributed to the good performance of their business rather than to a fair pricing of their issuers.”

Streeter adds: “There is high retail investor interest in IPOs and we would like to see this satisfied by more companies looking to list, as all too often the ordinary investor is left out of the initial opportunities presented by IPOs.

“What has been encouraging is that we have seen repeated clues that the rights of retail investors when it comes to capital raises are being championed quite strongly by the UK government which is very welcome.’’

See also: AJ Bell, Hargreaves and II demand greater access for retail investors in IPOs

A tough climate for new listings

It could be argued that the IPO activity in 2020 was due to government stimulus programmes, post-pandemic optimism, improved macroeconomic indicators, and pent-up demand. A lot has happened since then – would most IPOs be concerned about a positive reception coming to the market right now?

Streeter insists that timing is everything for an IPO and given the invasion in Ukraine has added to fuel to the volatility plaguing financial markets since the start of the year, she believes plans for fresh offerings are likely to be shelved until calm returns to indices.

“The conflict is likely to be another inflationary driver and central banks have already indicated soaring prices are set to lead to steeper interest rates, which could add to the nervousness surrounding tech valuations in particular.”

She thinks many companies planning an IPO are likely to wait until there is a break in these very dark clouds before going to market.

“Given the number of delayed listings it seems investors are more cautious and more sensitive to IPO pricing. Institutional investors also have a much keener eye trained on environmental, social and governance issues with ESG expected to be high on the agenda of firms looking to list.”

Cordero takes a similar line. “Market momentum is the most important factor when it comes to predicting the success of a large number of IPOs. We have seen companies like WeTransfer cancelling their IPO plans because the market wasn’t strong enough, or at least that was their claim.”

He adds: “That being said, strong companies with strong leadership, solid balance sheets and steady growth will do well with their IPOs in any market.”

Tumkur expects 2022 “to see less of an onslaught of IPOs as the market is less optimistic about future prospects for technology, specifically, and corporate profits in general, given economic uncertainty, exacerbated by the war in Ukraine”.

He says both investors and companies will be wary; with the former “extra selective given the experience of many IPOs in 2021” and the latter nervous about getting a positive reception.

“The lessons for a successful IPO would be to not model or price in all the possible good news, but rather to run with more realistic profit expectations, given all the economic uncertainty, and leave scope to surprise on the upside. An IPO which performs well is likely to lead to a more receptive environment for founders and private equity to sell down subsequent blocks of shares.”

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