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Investors will buy into the right IPOs at the right price

Recent flotations in the UK have been somewhat disappointing, but US IPOs have been charging ahead. What’s going on?

Garry White

in Features


The flotations of Aston Martin and Funding Circle have flopped at a time when US markets are embracing the IPOs of a plethora of loss-making businesses. Companies listing on Wall Street this year are less profitable than ever before – including at the height of the dot-com boom – but they have been warmly received by markets. Are the disappointing UK floats a sign that market sentiment is becoming more fragile?

Loss making peer-to-peer lender Funding Circle is trading around 20% below its listing price and the flotation of Aston Martin last week did not motor ahead, despite listing at a lower valuation than management had hoped. Its shares are down about 14%. Sceptics had criticised both companies – and in particular their bankers – for over-optimistic valuations. Aston Martin and Funding Circle were both forced to slash expectations of their float after resistance from fund managers.

However, Wall Street continues to embrace a plethora of new companies despite their lack of profitability. Data compiled by the University of Florida’s Professor Jay Ritter, known as “Mr IPO” because of his detailed research into new issues, showed a staggering 83% of businesses that floated on Wall Street in the first nine months of 2018 did not make a cent in the year prior to their IPO. In the technology frenzy at the end of the last century that figure reached a high of 81%.

Of course in the US there is a lot more positivity about equity markets than in Europe, where questions over the shape of Brexit and concerns over Italian resistance to Eurozone budget requirements is creating uncertainty. This positivity could be helping Wall Street investors take a longer-term view. For example, the float of a loss-making online-polling company SurveyMonkey last month was a success. Its shares saw a massive jump when it listed in New York, soaring 44% on their first day of dealings. This is despite the group posting a net loss up more than 40% to $27m in the first half of the year and a loss of $24m last year. However, SurveyMonkey has managed to firmly plug itself into the technology theme, with its prospectus noting partnerships with companies such as Microsoft and Google. Facebook’s chief operating officer Sheryl Sandberg is on its board and her philanthropic trust owns more than 8% of the business. With the technology sector leading the charge in the current bull market, these associations are likely to have helped its valuation.

It has also been a relatively good year for US biotechnology IPOs such as gene therapy company Solid Biosciences. These companies can be lossmaking for years, but if their products are successful then profits can be outstanding. Confidence in the sector is being driven by the impact of data science, which is about the extraction and application of knowledge from large data sets. However, many gene and cell therapies haven’t proven to be commercially viable. Still, investors seem willing to back these companies right now.

Another sector that has been extremely popular in the US relates to cannabis, which is now moving from the black market to the stock market as legalisation moves are made around the world. Medicinal cannabis company Tilray floated on Nasdaq in July at $17 a share and is now up by an astonishing 760%. Investors want to buy into the “Google of marijuana” following claims that the fledgling industry will be bigger than brewing within a few years. Indeed, more companies active in the sector are expected to list in Europe in the new couple of years, with Danish firm StenoCare announcing plans to float in Copenhagen next month. It is the first Danish company to get permission to import, produce and sell cannabis oil in the country and is raising money to build its own production facility, allowing it to serve its local market and export to other European markets. Of all the sectors mentioned this one certainly looks like a bubble and investors need to be very cautious.

Another bubble that has been brewing involves cryptocurrency and Blockchain – and we have some interesting IPOs to come here too. Bitmain Technologies, the world's largest designer of the semiconductor chips that are used in Bitcoin mining, plans to list in Hong Kong. This is likely to be the biggest-ever cryptocurrency float. This company actually makes money, with profits up nine-fold in the first half of the year, as its equipment is used to create about half of the world’s Bitcoins. However, the slump in cryptocurrencies could ultimately put this IPO at risk.

Perhaps too much shouldn’t be read into the disappointing flotations of Aston Martin and Funding Circle. However, what’s going on in the US shows that investors are willing to buy into companies that have exciting long-term plans if the IPOs are priced right – even if actual profits may be years away. The two recent listings in London have some question marks over longer-term fundamentals – and Funding Circle was basically a lender trying to get valued at a fintech price. Even investors with their focus in the long term couldn’t quite bring themselves to buy into these IPOs at the price the advisors wanted. Lessons have hopefully been learned.

A version of this article appeared in Friday’s Daily Telegraph.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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