An old but important lesson for investors

Seen from our present wasteland of an initial public offering (IPO) market, 2021 was a vintage year for UK listings. A total of 174 companies debuted on the LSE in the period, a close third in the list of highest annual tallies since 2007.

Or rather, it was a vintage year for companies, their founders, and advisers. Investors, despite embracing almost anything that came to market, fared less well.

Reasons varied. There were grade-A car crashes, such as Made.com and In The Style (ITS). Others – Dr Martens (DOCS), Victorian Plumbing (VIC) and PE houses Petershill (PHLL) and Bridgepoint (BPT) – were well-timed sales. Another group includes stocks priced on frothy sentiment in all things technology, such as Devolver Digital (DEVO), Alphawave IP (AWE) and Deliveroo (ROO).

All told, the average loss from companies that listed in 2021 is 46 per cent to date. On balance, larger floats did worse: of the roughly £14.5bn of primary capital raised, more than half has gone up in smoke. Nor can a rough market be blamed: buying the FTSE All-Share in 2021 would have netted you a minimum total return of 3.6 per cent (and a maximum of 24 per cent).

PensionBee (PBEE) occupies a fourth category. In April 2021, after a period of rapid growth as a private company, it raised £55mn to continue what it had been doing since its 2016 launch: adding customers and assets under administration to its pension consolidation platform.

When it listed, the company told investors it expected to spend up to £60mn on marketing costs over three years and to reach break-even by the end of 2023. This was on an adjusted cash profit basis, defined as earnings before tax, finance costs, depreciation, share awards and one-off items.

In the first nine months of 2023, revenue hit £17.1mn, in line with operating costs, but before marketing spend of £9mn, meaning the company posted a £9mn loss before adjusted items, largely made up of share-based payments. Despite this, the business has maintained guidance for “ongoing [or monthly] adjusted Ebitda profitability” before the year is out.

Despite doing pretty much what it set out to do, PensionBee has been typical of its graduation class in one respect: its shares are down 64 per cent since IPO. On the face of it, this might seem a headscratcher: as well as delivering its goals as a plc, the group appears to have a bright future ahead of it.

With an average age of 40, its customers should be a strong source of net inflows for years to come. Solid net promotor scores should boost the asset pile further, lowering already-falling acquisition costs. Eventually, market returns will improve, while a long-delayed (and state-led) pensions digital dashboard initiative should act as a huge free marketing tool when it launches in 2026.

Nor is PensionBee aiming small. A five-to-10-year goal to take a 2 per cent share of the transferable pensions market would mean increasing its invested customer base five-fold.

The question for shareholders remains when the business can wash its face. Aggressive marketing, latterly via TikTok ads and the shirtsleeves of Premier League side Brentford FC, has thinned the cash pile to £12.5mn, making 2024 a crunch year. For marketing costs to soon be financed out of revenues, as chief executive Romi Savova expects, sales will likely have to leap another third over the next 12 months. If the pace slows, then either marketing spending will need to adjust, or the business will need a cash injection.

At around four times forward sales, the shares trade at about a fifth of their valuation in July 2021. So while PensionBee’s current trajectory should avoid the need for a follow-on equity raise, any returning investors would likely improve their stakes in an at-the-market share sale.

The lesson? Although not new, it’s worth repeating: starting prices matter. As was clear at IPO, investors overpaid for access to a well-run and highly scaleable UK growth business. In turn, that likely obscured PensionBee’s potential to later investors. Over the next two years, the fog may well start to lift.