IN THE biggest flotation of the year so far, the housebuilder Crest Nicholson has returned to the stock market. One swallow doesn’t make a summer, but given that we have now seen a flock of the creatures, it’s clear that the initial public offering (IPO) market is open for business.
The backdrop for such transactions is better than it has been for some years. First, we are talking about quality companies, sensibly priced, with credible management, and Crest Nicholson ticks all these boxes with panache. It follows Direct Line – another hugely successful float, that has traded well ever since. These are not like some of the poorly-conceived and poorly-priced priced companies that appeared on the market in the mid-1990s.
Institutional clients are also looking for new ideas: the lack of IPOs and the attrition of companies through takeovers has led to a shrinkage in the investable equities universe. In particular, the quoted tech sector has shrunk dramatically, with Autonomy, Logica, Misys, Psion, Kewill all ceasing to exist. But now, for the first time in a while, we are seeing flows into equities. With the “Great Rotation” only just beginning, this can be expected to continue for the foreseeable future. Valuations remain attractive, particularly relative to other asset classes, and the global economy is at last beginning to recover from the 2008-9 crisis.
A handful of institutions have previously criticised IPO processes. BlackRock sent a letter to the investment banks with concerns about excessive valuations. It encouraged smaller syndicates and opposed fees based on valuation targets. More recently, Legal and General has raised similar concerns in a submission to the UK Listing Authority.
But these criticisms have been taken on board by responsible banks and advisers; engagement with investors now starts earlier in the process, syndicates are smaller, involving mid-cap specialists for mid-cap stocks, and more thoughtful pricing has meant fairer valuations.
Another factor that has lent support is the significant interest garnered from retail investors, particularly in Hong Kong and Singapore. For the UK model to thrive, weakness in this area must be addressed, and individuals’ appetite for IPOs and equity investment needs to be rekindled. This could be done by involving brokers with long-standing relationships with retail wealth managers in syndicates, and by giving them the responsibility for the intermediaries offer and for corralling the offer through their platforms. In cases where the UK government is the vendor, and for companies with a well-recognised brand, promotion to retail investors could prove very helpful in achieving a successful float.
A functioning IPO market is vital to the future of the UK economy. Businesses must be able to come to market to raise capital to fund opportunities, and to create wealth and jobs. This market is now open. But for the creation of a really thriving and sustainable IPO market, we also need to broaden the pools of capital, and the retail investor should have a place alongside the institutional.
Andy Crossley is head of corporate sales/syndication at Peel Hunt.