IPOs are back

IPOs are back

"IPOs have returned with a bang to the London market," says John Hammond, head of Equity Capital Markets at Deloitte. He comments that the pick up in IPOs has been spurred on by the "strongest market sentiment for years".

The rebound in equity markets has attracted sellers who have been sitting on their hands waiting for the right exit valuation. London Stock Exchange (LSE), reporting its half-year results recently, said that the amount of capital raised by its primary markets business was up 114 per cent to £16.3bn, "reflecting a good recovery in equity issuance". According to statistics from the exchange, there were 70 IPOs on London’s main market and Aim by the end of October 2013, with a clutch more set to list by the year-end. That compares with 61 IPOs in 2012.

While 2013 was a notably bigger year for IPOs than 2012, there is every reason to suspect 2014 will be bigger still. London Stock Exchange's outlook comments at the time of its results were upbeat; "looking ahead, the pipeline of companies working on joining our markets remains encouraging". And there is plenty of room for recovery as we are still sitting well below previous records for IPO activity. The best year ever for London IPOs was 2006, which saw 307 companies float, raising £26bn. With pent-up demand after several slim years, we are likely to see IPO activity continue to ramp up from here, as long of course as equity markets and the economic backdrop remain supportive.

IPO barometer

IPOs in 10 months to 31 October 2013 and share price and FTSE 100 performance from listing date to 31 October 2013.

And it's not just resource plays

The return of confidence to the IPO market has attracted a more diverse bunch of listing candidates than recent years, which had been dominated by resource and oil and gas plays. High-profile names such as Crest Nicholson (CRST), Countrywide (CWD) and Foxtons (FOXT) took the plunge in 2013. And of course we had the £3.3bn float of Royal Mail (RMG), which was the largest IPO in Europe since Glencore Xstrata's (GLEN) float in April 2011. Across the pond, investors were all a tweet about Twitter, with the shares soaring 73 per cent on its stock market debut. And London's tech IPOs enjoyed a revival, too - Servelec (SERV), which made a strong debut in early December, was the largest UK tech company IPO for three years.

An improved picture for the UK economy has been instrumental in driving demand for new listings, with plays on economic recovery back in favour. It is hard to see Foxtons and Crest Nicholson attracting many fans a few years back when the housing market was stalling, but all three were given a warm reception by investors and have enjoyed solid gains since listing.

Another trend has been the return of private equity to the scene. A large proportion of the main market IPOs of 2013 were private equity-backed companies after a drought of such offerings in the previous year. And this is a trend that shows every sign of gathering steam, with 2013 closing out with the mega IPO of hotel group Hilton Worldwide by Blackstone in the US.

Aim IPOs get tax break boost

The decision to allow investors to hold individual Aim stocks in tax-efficient individual savings accounts (Isas) and the abolition of stamp duty on Aim share transactions from April 2014 has provided a shot in the arm for London's junior market. According to Deloitte, the third quarter of 2013 was the first quarter not to include a net loss of companies traded on Aim in any one month since 2010.

"In addition to increased flexibility over Isas, there is a general upswing in the number of companies seeking an IPO. Taken together, Aim might well be attracting a new type of personal investor," says Richard Thornhill, Equity Capital Markets partner at Deloitte. He adds that although there have been concerns that Aim's growth potential has been overvalued in the past, the IPO upswing looks set to continue in the near term. "We are seeing a strong pipeline of companies seeking to list in 2014, heralding a significant year for IPOs," he says.

Returns good but insurance and energy struggle

Research by Deloitte suggests that the return from investing in IPOs has far outpaced the performance of the broader market. If an investor had invested £1,000 in each of the 10 main market IPOs in the first 10 months of 2013 - making a total investment of £10,000 - the holding would have been worth £13,520 on 31 October 2013.

Had the investor invested each £1,000 in the FTSE 100 index at the time of each company's IPO, the holding would have been worth only £10,488. So the return from investing in the IPOs is £3,032 more, or seven times greater, than investing in the FTSE 100. The research found that seven of the 10 main market IPOs in the first 10 months of 2013 outperformed the FTSE 100 - described by Deloitte as, "typical of a new confidence surrounding IPO activity". What's more, on average, share prices of those 10 IPOs outperformed the market by an impressive 30.3 percentage points.

But not every IPO has been a winner. Insurance IPOs, for example, have been notably choppy. Concerns over sales growth amid intense competition have weighed on Partnership Assurance (PA.), whose shares were down 20 per cent from its float price at the time of writing. And rival annuities provider Just Retirement (JRG) made a lacklustre debut in November, falling 5 per cent on its first day of trading. Shares in non-life insurance company esure (ESUR), meanwhile, are 15 per cent below the float price after its maiden dividend fell short of hopes.

Energy and renewables floats have also been a soft spot amid an uncertain political and regulatory backdrop on energy price policy and subsidies for renewable energy. Energy investment vehicle Riverstone Energy (RSE), renewable energy generator Infinis (INFI) and renewables infrastructure funds Foresight Solar (FSFL) and The Renewables Infrastructure Group (TRIG) were all trading below their float prices at the time of writing.

Royal Mail is away… who's next?

As the debate rumbles on over whether Royal Mail was priced too cheaply, the share price performance since float does at least provide reassurance that there is sufficient demand for large IPOs. It’s still early days when eyeing IPO prospects for 2014, but there are already several big names in the frame. Over-50s insurance group Saga is one of the larger ones being touted with a reported valuation of £3bn.

Potential 2014 IPOs

Foreign exchange specialist Travelex could be another biggie with a mooted price tag of around £1bn. And Chinese chemicals giant Tianhe Chemicals is said to be looking at a $1bn London listing, which would be a notable coup for the City versus the likes of Hong Kong and Singapore. There’s even talk of a bold attempt to persuade China's largest e-commerce company, Alibaba, to consider London for its mammoth IPO, which could value the firm at over $100bn. Other potential IPOs in the pipeline include online retailer Boohoo, hoping to replicate the success of Aim superstar Asos, as well as discount retailer Poundland.

Then there are the government's stake in banks RBS and Lloyds to be sold off. The government has dipped its toe into the water with the sell off of a small part of its Lloyds stake through an institutional placing. But its RBS stake, currently worth around £16bn, is more of a headache. The shares are below the price that the government paid for them and the bank’s recovery has been patchy.

The bank's chairman said in May that RBS could be ready for privatisation within a year and there has been talk of a retail offering if the government were to attempt a large share sale. But, for now at least, there remains a great deal of uncertainty on the government's privatisation strategy.