Inside Track: Three reasons why the new issues market is struggling

 
David Hellier
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AS ADVISERS to Saga put the final touches to the largest flotation so far this year in the London new issues market, it is an opportune time to look at where we stand.

Few could deny that the London new issues market, so dormant a couple of years ago, has come back to life. Since the beginning of the year there has been a constant stream of companies wishing to tap a welcoming market for funds.

Bank pipelines are said to be still strong and even technology companies, seen as unsuitable for London as recently as last year, have made the decision to float in London and more, such as the property website Zoopla, are waiting in the wings to do so.

However, in the last few weeks there have been some concerns about the market as some recently-floated stocks, such as Pets at Home, Just Eat and AO World, have all traded below their issue price.

Such concerns recently prompted Rob Leach, head of EMEA equity capital markets for the giant global fund manager BlackRock, to write confidentially to banks to canvass views as to why the market isn’t functioning as smoothly as last year (by that he principally means why there are a significant number of companies with their shares trading below issue price).

BlackRock’s intervention is significant to many in the market because it was this institution’s intervention in 2011, hitting out at the level of bank fees and the size of syndicates, that closely preceded the effective shutting of the IPO market in 2012.

This time there’s no feel of alarm about the state of the markets, just concern not to let what happened before repeat itself and a keenness for everybody to communicate better for the sake of the market as a whole.

BlackRock’s reaching out appears to have identified at least three main themes.

Some of the setback in share prices, especially of the technology-related groups, is due to the volatility of the markets, especially Nasdaq. Therefore on this at least, there’s not really a London factor to eradicate.

But issues have been raised about the sheer number of companies coming to the market; whether all of them are ready to float and whether investors and advisers are able to devote sufficient time to each one. The highish volume of issues, some say, has led to there being less time for the all-important price discovery process.

Another theme that has emerged is whether some investors have been showing less discipline on their price limits, effectively bidding too high for stock.

The up-shot is that the market’s functioning reasonably well, but there’s room for improvement. Keep a wary eye out but don’t panic – yet.

david.hellier@cityam.com