Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Tom Stevenson, Investment Director at Fidelity Personal Investing, comments on the likely surge in IPOs following the success of Alibaba’s listing.
Bankers who sat on their hands during the referendum campaign are thought to be dusting off a string of initial public offerings (IPOs). The success of the high profile flotation of Alibaba (BABA) in the US last week, raising $25 billion and rising to a 36% premium to the issue price on the first day’s trading, is likely to encourage investment bankers that there is high demand for attractive growth stories.
In the UK, Aldermore was first out the blocks. Aldermore is one of the new breed of ‘challenger’ banks looking to chip away at the dominance of the traditional High Street financial brands. It announced on Monday that it would be issuing £75 million of new shares to help build its business.
Other flotations thought to be in the pipeline include Miller Group, the Edinburgh-based housebuilder, and RAC, the UK roadside recovery group owned by private equity group Carlyle, if it is not sold off first to a potential Far Eastern bidder. In the UK so far this year new issues have raised more than £34 million, compared to around £32 billion in the whole of 2013.
An acceleration in flotations is typical of the later stages of a bull market, so five and a half years after stock markets started recovering in March 2009 it is unsurprising that the owners of privately-owned companies are looking to bring businesses to market. Selling shares to new investors is tough when uncertainty is elevated so the possibility of a Yes vote in the Scottish referendum caused many floats to be put on hold temporarily. Now the economic, if not the political, uncertainty has been lifted, the backlog should start to clear.
Flotations can be a money-spinner for both existing shareholders and new investors if the shares are attractively priced and move to a quick premium after dealings begin. But buying into new issues is risky as floats can also flop. Investors inevitably take a lot on trust when they invest into a business without a track record as a publicly-quoted company. They should also ask themselves the awkward but obvious question: why should I buy these shares that the owner of the business is prepared to sell at this price? What might they know that I do not?
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