F&C - IPOs may fare better in small cap

Many industry experts predicted that increased IPO activity would feature prominently throughout 2010, with a backlog of companies waiting to float following the effective closure of this avenue over the last few years and whilst banks remain reticent to lend.

In line with expectations, IPO levels have indeed increased with some high profile companies - such as New Look and Travelport - trying to come to the market recently in an attempt to raise funds. However, many have had to withdraw once the market made it clear it was not prepared to pay the valuations being asked for what appeared to be an exercise in paying down debt in over-leveraged private equity situations.

Whilst it would seem that the market is not quite ready for IPOs at the larger end of the market, Catherine Stanley, F&C's Director, UK Small-Cap, believes the story is very different at the smaller end of the market.

"There are some quite interesting companies at the small-cap and tail end of mid-cap - around £25m-£400m - which are looking to come to the market and are more likely to have successful flotations. These are largely companies which are not private equity-backed or over-leveraged, but rather have sensible balance sheets and cashflow. What also sets them apart from the high profile IPOs is that they are likely to have more realistic pricing expectations," Stanley commented.

One such example was the recent IPO from Digital Barriers, a £25m market cap new venture from the team behind Detica Group plc. Previously a supportive shareholder in Detica, Stanley seized the opportunity to invest in a start-up company from a quality management team with a proven track record.

Should the IPOs for these smaller companies be successful, Stanley believes that this could open the door for similar companies to come to the market and signal the return of healthier, more normal market conditions.

Stanley concluded: "Whilst the headline news in the wider market place looks very negative for IPOs, that shouldn't detract from the fact that at the supposedly less glamorous small-cap end of the market, the IPO channel looks set to reopen."