Lacklustre IPO market down to “too many advisers”
The UK equity market has proved itself to be remarkably resilient in light of the headwinds during the first quarter; results season has been fairly robust and the valuation of the market remains compelling versus other asset classes.
Peter Lees, Head of UK Equities at F&C and manager of the F&C UK Equity Fund, believes the main question now is how companies can use their strong balance sheets in the most efficient fashion.
"We genuinely believe good companies will be able to utilise their cash in a robust way which will allow operational gearing to come to the fore and allow these companies to trade on superior multiples to their peers. We are beginning to see strong signs of growth capital being deployed but there is ongoing merger and acquisition activity which is also currently underpinning the market," Lees commented.
Nevertheless, Lees notes with interest that the IPO market continues to struggle in the UK compared with the strong performance we are seeing in the US and Europe. Lees believes that there are a number of reasons for this: "Firstly, there are a lot of asset allocators who have switched out of UK equities into global equities and thus there isn't a ‘normal' pool of capital available; secondly the IPOs have come relatively late in the investment cycle. We are just over two years into the recovery and as such ‘the risk trade' is less compelling. Investors are therefore perhaps more inclined to support the companies they really believe in and truly understand rather than simply investing in the latest new stock." Lees maintains there have been a number of IPOs where the underlying businesses have been good, however in his view the vendors and their advisers have been asking just too high a price and this has caused real issues between investors and sellers of the business.
"Indeed, we would go as far as to say that there are far too many advisers attached to each individual IPO, meaning that a robust discussion can not happen. This is definitely to the detriment of the company concerned.
Some new companies would be nice!" Lees concluded.