IPOs are an exciting prospect for investors, as companies with strong potential are key to any investment strategy or as an attribute to a portfolio.
However, the turbulent stock exchange market means that investors need to be very aware of where IPOs are launching and where they are likely to perform best to avoid an underwhelming return.
Despite heavy inflation, the build-up of venture-backed start-ups over the past ten years means there’s still plenty of opportunity lying ahead for 2022.
A new report by City broker IG Prime, shared exclusively with City A.M. today, shows which sectors and have seen the best result following IPOs and how this reflects in where investors should look to invest in the future.
The trader looked at companies listed on Nasdaq and NYSE in the US – as well as the London Stock Exchange in the UK and the Stock Exchange of Hong Kong – and compared performance of IPOs across sectors, over time since launch, and the location of the company.
Energy vs real estate
In the US and UK markets, shares that gained greater value over the long term often suffered in the short term, suggesting that investors need to be consistent and patient to see a return.
With both US and UK exchanges showing decreasing value for the energy sector, it seems that investors may wish to maintain caution when reviewing energy IPO options.
Real estate had the highest market capitalisation in the UK market and Chinese real estate within Hong Kong – while not necessarily the best investment for share value, there is definitely profitable return within this market and scope to explore how these could positively contribute to a portfolio.
The research indicates that in the long term, companies are more likely to see steady growth using IPOs, as those that went public in the past, are now worth more in comparison with their original share price.
Companies listed on the London Stock Exchange saw marginally higher returns overall than their counterparts in the US, with median share prices at 104.73 per cent of their IPO value.
In January 2022, there were six new listings on the LSE. The median number of companies curated per year since 2000 is 2.5, indicating there has been an influx in IPOs in LSE in recent years.
The sector with the highest increase in share value since IPO was Industrials– companies in this sector showed a median of 146.69 per cent of the value they held when made public.
However, Real estate had the highest market capitalization in the exchange with a median of £408.83m.
Similarly, as with the US, the sector that suffered the most was energy with a median of only 10.34 per cent of its IPO value.
Companies launched in the UK only reached third overall for highest median share price as a percentage of the initial IPO share price. The top option instead was Cyprus, which saw a median of 160.32 per cent of its value since IPO.
As of 24th January 2022, 363 future IPOs are listed for the US market, with nearly 5 billion shares in total recorded to be offered.
Generally, these companies saw growth since their IPO and this was reflected in their median share prices which sat at 102.61 per cent of the value they possessed when initially launched.
The sector that saw the greatest growth across the NYSE and Nasdaq was the broad area of Basic Industries– this covers the discovery, development, and trade of raw materials used in other industries. The share prices stood at a median of 160.38% of their original value.
This compared to the sector that suffered the most, energy including coal mining and consumer electronics, in which the median value of shares was only 71.77 per cent of their IPO value.
The strongest-performing state listed on US exchanges for companies since IPO was Vermont, US, where the median share value of companies sat at 483.83 per cent of their value at IPO.
This was followed by Iowa, US, where the share value stood at 358.72 per cent of their IPO value.
Hong Kong IPOs
Results for Hong Kong are reflective of short-term performance. Regardless, median share prices were significantly lower than they were at IPO, with shares at only 68.29% of the value at IPO. This indicates that Hong Kong-listed companies have recently seen some significant underperformance.
The energy sector proved to be the most successful IPO sector in Hong Kong – shares stood at an average of 238.57% of their original value.
The highest market capitalisation, which also reflects in the UK results, was in Chinese real estate, with a median of 6,753,350,000 HKD.
The worst-performing sector overall was engineering, where shares stood at a median of only 30.89% of the value they had at IPO.
The recent tensions from US and Chinese regulators has meant the market is shifting from Chinese influence towards an interest by the US stock exchanges in South-East Asian markets.
With the risk of interference by Chinese and US regulators, Chinese listings have become more scarce – but Nasdaq remains optimistic, seeing the entire region as “ripe for IPO activity”.
However, time will tell whether the most recent years reflect the US and Chinese discrepancies in the performance of funds.
The SPAC (Special Purpose Acquisition Company) has been booming recently with deals in 2021, within the US jumping 6.5 per cent.
But there is concern over how long-term this will be as investors rush to bid. Analysis has also shown it’s not a sustainable investment for growth, and near-universally it sees negative returns.
Currently, SPACs don’t appear to be slowing the rate of IPOs instead there is rapid investment in both.
This year, the US digital banking business Chime and vegan-friendly “meat” Impossible, were valued at $25bn and $4 billion according to Forbes, meaning investors should watch out for IPOs within this space.
Burger King, Zopa, and Monzo have also been talking around the idea of IPO listings sometime in 2022 following the Financial Conduct Authority relaxation of listing rules.