The market for new share issues in London has shown some signs of reviving this year, but at Aberdeen, where we manage £124.2bn in equities globally, around £3.4bn of which is invested in the UK, we remain cautious about investing in new issues, for a number of reasons.
For a start, many experienced fund managers, ourselves included, have not forgotten the last great boom of initial public offerings (IPO) at the end of the 20th century, in what became known as the TMT bubble. Investors were scarred by companies with weak business models which came to market in a flurry of excitement but ultimately collapsed, leaving shares worth a fraction of their new issue price.
Secondly, our investment process is simple, and the number of name changes we make in a portfolio in a given year is typically very small. For us an existing listed company with a long track record of delivering is more often than not preferable to an exciting but less well proven new issue.
So to displace an existing portfolio holding an IPO needs either to give us significantly better quality for the same valuation multiple, or be priced significantly more attractively for a comparable quality of business.
And finally, private equity backed deals which have involved asset stripping and high levels of indebtedness also make us cautious as time and again we have seen those businesses struggle as there is little operating “fat” left in the business to cushion it when times get tough.
As a result of all of these trends, there is less capital available and more scepticism on the part of shareholders to new issues. IPOs that are successful are likely to have robust operating models and market positions with good asset backing and strong cash flow generation.
Even then, we are more likely to bide our time as investors, and wait for the management team and company to “season” rather than leap in and snap up a new issue. In the investment world, good things are (more likely) to come to those that wait.