Those who have invested in a private company can enjoy a boost in valuations when it goes public – but that isn’t the case when markets have no appetite for it. Businesses that try to make an initial public offering (IPO) in hostile conditions are less likely to reach a fair price for their shares, which is why Scottish Mortgage deputy manager Lawrence Burns has encouraged some of his private holdings not to list in recent years.
Just over a quarter (26.4%) of his £11.7bn trust is held in private companies, including Elon Musk’s SpaceX (its sixth-largest holding) and TikTok owner ByteDance. Many are “quite large, quite profitable” businesses that are known to public markets and would get a lot of attention should they list, according to Burns, but he has urged those considering an IPO to wait for a more opportune time. Markets globally have been less willing to invest in newly listed companies in recent years, meaning those choosing to go public may not fetch a fair price.
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Burns says: “We don’t want companies to IPO sooner than they should. We also don’t want them to leave it too late – it’s about each individual case and doing what’s right for them. Over the past couple of years, have we occasionally encouraged companies to not IPO? Yes. Apart from anything else, we think these are very valuable companies, so we want them to list in a market that will appreciate that value.”
Is a bounce-back coming?
But this dry spell for IPOs could soon be coming to an end.
Two of Scottish Mortgage’s private holdings have tried to go public this year as risk appetite improves. Healthcare technology company Tempus successfully listed in the US for $411m (£325.4m) and autonomous driving software business Horizon Robotics is attempting to raise $500m on the Hong Kong stock exchange. If markets continue to support new listings, Burns foresees a bounce-back in IPOs.
“One of the headwinds over the past few years is that the IPO markets have closed, but we see early signs that the environment is going to be a bit different from here on,” he adds.
However, while most markets around the globe became more cautious of new listings in recent years, the UK has been slower than most in welcoming back IPOs. Last year, it raised just £954m from the 23 IPOs that took place – a fraction of the $24bn raised in the US over the same period.
Yet Matt Evans, manager of Ninety One’s UK Smaller Companies fund, argues that a high level of scrutiny is healthy for markets. “People say it’s a hostile environment – well it should be challenging, because we are investing in companies that need to be able to deliver profits and growth over and above things that are already listed,” he says.
Being rigorous in examining new companies may be a positive in normal market conditions, but after a prolonged period of below-average listings, are UK investors being overly scrutinous? The 23 IPOs that took place in 2023 were over three times lower than the 74 companies that went public the year before, and an even more drastic five times lower than the 126 listings in 2021.
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It’s something that has not gone unnoticed by Evans. Private companies may not be listing as frequently on the UK stockmarket, but it’s not because investors are more pessimistic – it’s because the market dynamic has changed. Equities in the UK are trading at historically low levels (with an average P/E ratio of 13.5, they trail far behind the rest of the world’s 20.3), making it a buyer’s market. Investors have far more choice, so any new entrant would have to stand out from the sea of opportunities.
Evans says: “The market is full of really good businesses that are doing a good job, but on cheap valuations, so the competition for an IPO is just different now. It doesn’t mean there’s a cynicism, it just means we’re in a different environment where there isn’t a balance in the same way for buyers and sellers. I’ve got far more choices now as a buyer to get good companies at appealing valuations.”
Read the rest of this article in the July/August issue of Portfolio Adviser magazine
