Even though the UK stock market has performed modestly this year (up 9%), ordinary investors continue to pour funds into equities and investment funds. Low savings rates and inflationary pressures have convinced many investors that it is far preferable to engage in commodities that have the potential of outperforming inflation, even when those returns are not assured.
The sluggish stock market hasn’t stopped entrepreneurs from believing that now is the appropriate time to go public and list their companies on the London Stock Exchange, which has often turned riches for owners and executives. As a result, nearly 100 companies have gone mainstream this year, ranging from transportation company Deliveroo to DNA sequencing company Oxford Nanopore, selling stocks via an initial public offering (IPO) which can then be exchanged in London.
It was the most floats in a single year since 2014. So is there any good news? Yes, however, there are fears that some (not all) companies would enter the market at exorbitant prices, rendering early investors unhappy as the stock price falls. The IPO market has now become ‘Jekyll and Hyde’ in character, according to Dan Lane, senior economist at share dealing firm Freetrade, with ‘lower quality IPOs like Deliveroo threatening the general quality of the stock market.’ ‘There’s a risk that businesses would hurry to cash in on a torrent of lockdown cash,’ he cautions.
Mike Coombes works at PrimaryBid, a firm that assists businesses in making their first public offerings (IPOs) as individual investor-friendly as possible. Private companies should be able to buy stocks in all IPOs at the offering price, according to PrimaryBid, rather than having waited until the shares are traded. With our Fair Play for Small Investors campaign, The Mail on Sunday supports this viewpoint. While he acknowledges that certain IPOs have disappointed investors in terms of returns this year, he believes that a healthy new share market should be embraced.
‘It’s wonderful news for investors that more companies are coming to our public market,’ he says. ‘Equity funds are accessible, open, and very well financial instruments. Private investors can easily trade by purchasing shares in both old and new enterprises and mutual funds.’ While he acknowledges that IPOs have a high risk-to-reward ratio since investors take a risk, he believes that the ultimate success metrics are positive. PrimaryBid looked and analyzed the share value returns of 72 IPOs on the London Stock Exchange this year, whether they were on the primary market or the Alternative Investment Market (AIM). All of them were worth at least £10 million – smaller ones and secondary listings were passed through. The returns are calculated using the disparity between listing price and last Thursday’s closing share price.
The top ‘winners’ and ‘losers’ are listed below, with several well-known names among them. Darktrace, a cyber-security business listed on the FTSE100 (share price up 74%), and Auction Technology, an online auctioneer listed on the FTSE250, are among the winners (up 150 percent). On the other hand, furniture retailer Made.com (down 31%) and food delivery service Deliveroo are among the losers (down 33 percent). The average return across the 72 listings, as per PrimaryBid, is 8.2 percent, which is somewhat less than the FTSE All Share’s (9.1 percent) return this year.
‘Certainly, given the wide range of performance, the numbers demonstrate the high risk-reward aspect of initial public offerings,’ Coombes adds. ‘However, I would say that they are less dangerous than renowned assets like cryptocurrencies, which may sell their commodities nearly anonymously.’ Russ Mould is the investment director at AJ Bell, a wealth management firm. He thinks it’s great that more companies are trying to raise money on the London Stock Exchange. However, he agrees with Freetrade’s Lane that investors should not be fooled by the hoopla that typically surrounds new stock listings and wind up overpaying for their stock.
‘A fresh share offering should be examined and analyzed in the same way that a firm whose shares are currently traded on the market,’ he argues. ‘First and foremost, an investor must check that a new share meets four criteria: it fits their entire investing strategy and timeframe and their targeted investment returns and risk appetite.’
If a stock fails to pass all four tests, Mould advises investors to move on and battle the fear of missing out.’ On the other hand, if it passes these tests, an investor must subsequently research the company’s business model and growth potential. ‘If they like what they see and believe the stock is reasonably valued, the new shares may be worth buying,’ says Mould.
Why shouldn’t small investors get a part as well?
Experts believe that private investors should be able to purchase shares in the same conditions as big city organizations when it comes to new share issuance. This is currently not the case, so The Mail on Sunday is advocating for ‘Fair Play for Small Investors.’ When most firms launch their shares on the London Stock Exchange, they do so solely for investment firms at a pre-determined price. As a result, private investors will only be able to participate once stock trading begins.
Most new issues begin trading at a significant premium, which means they will have to pay more for their shares. Private investors should have access to a portion of all new share issuance, according to PrimaryBid. According to the report, retail investors are frequently considered “second-class citizens.”
Lee Wild, the head of equities strategy, Interactive Investor, agrees. ‘For far too long, new buyers have been abandoned in the IPO wilderness, frequently forced to pick up the leftovers after Big institutions have gotten their hands on the cream,’ he argues. ‘However, as pressure mounts on firms and their advisers to include a retail component in every stock market listing, individual investors must demand to participate on an equal footing.’