The UK’s initial public offering market saw a flurry of activity in 2021 and ended the year on something of a high.
In all, there were 77 IPOs – 36 on the main market and 41 on AIM – raising a total of £16.1bn, with the average raise reaching £209.5m, according to data from Peel Hunt.
Moving into 2022, expectations had been that it would be more of the same, with Baillie Gifford investment trusts Scottish Mortgage and Schiehallion readying themselves for the IPOs of food delivery firm Gopuff and data management company Cohesity.
But, as the saying goes, all good things must come to an end – and so it has been with the IPO market, which has had a very quiet 2022 so far.
Gopuff was expected to list in H2 2022, but it took the decision in April to delay those plans, opting to raise $1bn instead. Cohesity, meanwhile, has continued to play coy when it comes to naming its IPO date.
At this point in the year, Peel Hunt figures show that there have been just six IPOs, clocking up a total raise of £470m.
Pricing pain
Paul Jourdan, CEO of Amati Global Investors, says much of the appetite for IPOs was “absorbed” last year and that the issue now is a pricing mismatch.
“When the market goes into a bit of a tailspin, like it’s in at the moment, where you don’t know where interest rates are going to top out, you don’t know when inflation is going to top out, you don’t know how long the recession is going to be, it’s very difficult to price a new IPO,” Jourdan says.
“When pricing changes like that, it changes on the market in a heartbeat but price expectations in private company-land don’t change quickly at all. So [we’re] probably going to go through a period where price expectations from owners of private companies are still very high and price expectations on the market have completely changed. Those two things create a bit of a mismatch.”
However, there is a sense that the market for IPOs in the UK is due a correction, given how frothy it was last year.
Jourdan observes many companies that went public in 2021 ended up being overpriced.
This “deal indigestion”, as TM Crux UK Special Situations fund manager Richard Penny (pictured) calls it, meant at one point there were one or two IPOs a week.
“We saw a lot of deals last year and many of those deals are half the price of what they were,” he adds.
Footwear manufacturer Dr Martens was one of the many companies to make its stockmarket debut in 2021, with data from Abrdn showing the deal was priced at 370p, raising £1.5bn, and giving the business a market cap at issue of £3.7bn. Now, the company’s market cap is £2.5bn and its current price is 252 pence – a 32% decline.
Of the current IPO market, Penny says: “Most fund managers are looking at the situation, going ‘I’d rather buy some of the stuff from last year at a discount’.”
See also: Disastrous Deliveroo float continues to haunt the IPO market one year on
Time to be selective
However, Amanda Yeaman, investment manager of the Abrdn Smaller Companies Income Trust, says she remains “very selective” in the names she invests in at IPO.
“As long-term investors, we believe that a successful float, and subsequent period thereafter, is essential to gaining credibility as a listed business. When there is macro and market uncertainty, combined with logistic/supply issues from the ‘Covid hangover’, then this makes initial execution and delivery of expectations more difficult,” she explains.
“We would prefer a more stable environment to give the company the best possible chance of gaining a credible track record. We would always judge each listing on a case-by-case basis however, as some may well be suited to a difficult macro environment or be countercyclical.”
Among those companies that had been rumoured to go public this year are brewery group BrewDog and sportswear brand Gymshark.
But Yeaman expects, for the rest of 2022, investor appetite for IPOs will remain low, and that prospective sellers “might also be put off by declining ratings”.
Open for business?
Given that Penny also believes the market “is pretty much shut for IPOs”, what does that mean for companies which had planned to list this year?
He remarks that the pricing conditions will make it “fairly prohibitive” and suggests that, for companies, “it’s almost a sign of weakness that they would present themselves to the market now”.
But Jourdan believes the factors that combined last year – “peak margins, peak growth, peak optimism, ultra-low interest rates” – to create “a recipe for massive overpricing”, have not carried over into 2022, which might mean the numbers are more “realistic”.
“So, companies that compete in this market will be resilient and they’ll be hopefully good investments,” he adds.
It seems some companies need convincing though. Jourdan remarks that with the issues in the IPO market not likely to be solved “overnight”, delaying listing plans and opting to raise money in the private market first might not be the solution.
“I would encourage them just to do the deal that works for the public market as it is now, rather than sort of hoping it all improves and coming back later,” he says.
