According to analysis by financial professor Jay Ritter, newly listed companies underperform established counterparts by an annual average of 3.3 per cent in the first five years of trading. That supports anecdotal experience - a quick recap through similarly high-profile flotations over the last year or so shows that most haven't come anywhere close to living up to their hype.
Facebook is the most obvious example - its shares have slumped over 40 per cent to $22 since it hit the market in May. That won't have been too troubling to the original backers of the social media giant, who've still been able to offload large chunks of shares at a handsome profit since. Alleged preferential treatment of insiders is one reason why the scores of private investors who have lost money are suing pretty much everyone involved in the world's third largest ever flotation.
Over in the UK we're not quite so litigious, but IPO investors have just as much reason to be upset. The admission of accounting irregularities means anyone who jumped on board Nat Rothschild's Bumi when it floated will be nursing an 80 per cent loss in less than a year. Ocado's decline has been less precipitious - it's only lost-two thirds of its value in the two years since it went public – but is equally troubling. Like Facebook's backers, its private shareholders have managed to turn a tidy profit on their early-stage investments.
Such inequity of returns can only undermine investors' faith in new issues, and it’s encouraging to hear that the LSE is considering rule chamnges that could help address such shortcomings. If nothing else, they should encourage the principle that flotations should provide a route for companies to raise growth capital, not provide an opportunity for under-pressure owners to get out at the top.
Whether Direct Line follows a similar path to pain remains to be seen. Its recent financial performance has lagged industry rivals, and an OFT investigation lingering over the car insurance industry could prove a drag on sentiment for the foreseeable future. Its parent RBS is a forced seller, too, a condition imposed by European regulators on the £45bn bailout it received in 2008.
The flipside of this need to quickly complete the disposal is that at least the shares are certain to be offered at a chunky discount. And given that, as Professor Ritter points out, IPO failure is often down to inflated expectations of how a newly listing company will perform, a healthy dose of scepticism could in fact be the very thing that makes Direct Line a rare IPO success.
