Initial public offering (IPO) enthusiasts will need a new hobby for next year. Listings in London are slowing down. Brexit and market volatility have left commentators looking under the sofa for IPOs. Some companies have ploughed ahead with their plans – investment platform AJ Bell’s listing got off to a very strong start last week. But broadly speaking, this is not a good time to go public.
Looking backwards doesn’t reveal much, as there’s no meaningful trend in recent IPO activity. According to the London Stock Exchange, there have been 80 listings in the year to November. It is extremely unlikely that there will have been enough IPOs in December to take us up to the 107 companies that listed in 2017. Then again, only 67 companies listed at all in 2016 – perhaps for similar reasons as now.
Brexit has already had an impact, according to Sue Noffke, UK equities fund manager at Schroders. “Investors have indiscriminately shunned UK stocks as a consequence of Brexit,” she says. Before the 2016 European Union (EU) referendum, investors were prepared to pay around 15 times the UK stock market’s expected aggregate earnings for the year ahead. Today, this sits at around 13 times, compared to the global stock market, which trades around 15 times forecast 2018 aggregate earnings, she says. IT stocks, in particular, offer a healthy discount to global markets, according to Citi data, trading at around 14 and 19 times forward earnings respectively.
Bankers in London will look enviously upon their counterparts in the US, where a gamut of tech unicorns including Uber and Lyft looks set to stampede onto the New York Stock Exchange. Sure, we’ve had our own high-profile listings, two of which came in the form of Aston Martin (AML) and Funding Circle (FCH), but both have disappointed. Market corrections to seemingly overvalued listing prices leave the pair 23 per cent and 13 per cent down respectively.
Yet despite these omens, and the prospect of monetary tightening and slowing economic growth, some companies continue to push ahead with IPO plans.
So, who’s still feeling brave?
The mile high club
Private plane company AirX Charter has hired banker Investec and law firm Norton Rose for an IPO on the Alternative Investment Market (Aim), which it hopes to undertake in the second half of 2019.
The business, favoured by some international football teams, has not determined how much it intends to raise. It will use the proceeds to refinance some finance leases and expand the size of its fleet, which currently stands at 20 aircraft. Rather than purchasing new aircraft, which can carry punitive finance rates, AirX buys older aircraft.
Justin Scarborough, head of strategy and investor relations at AirX, thinks that listing the company will help to improve its fleet, its reach into the US, and boost the AirX brand. But its flight path is not entirely contingent upon going public.
“The growth of the business is not going to be determined essentially by doing an IPO,” he says. “The IPO is a means to an end in terms of doing more, and doing it faster,” he added.
The decision to list was taken over a year ago, and Mr Scarborough says that “if it was a perfect world”, AirX chairman John Matthews would have liked to list the company in March. For the benefit of those who have been living under a rock, this is the month that the UK is scheduled to leave the EU.
Accepting that we do not live in a perfect world, and with uncertainty reigning over whether planes will even be able to get off the ground in the Brexit aftermath, let alone stock market volatility, “nobody sensible would do that”, he says, hence the goal of listing in the second half of the year.
AirX is not alone in backing its business model irrespective of whether it lists or not, and emphasising that speed of growth lies at the heart of the motivation to go public. DWF, a Manchester-based law firm, has publicly flirted with the prospect of listing. The firm harbours ambitions of boosting investment in IT and “connected services”. It is “focused on an IPO,” according to a June statement, but insists that its current structure would also support its growth.
The company added: “If we were to proceed with an IPO, we believe that it would enable us to achieve our strategic objectives more quickly, while also enhancing our ability to attract and retain the best talent and to incentivise our people by aligning them through offering ownership within the business.”
It is unclear if and when the company plans to list. A spokesperson for the company said: “Nothing has changed and our position remains the same since we issued the original statement.”
The rule of law
AirX is rare at the moment, in that it is pretty unambiguous in its ambitions for life as a public entity. Other, more established candidates for IPOs, would prefer to test the water, and wait for the right temperature before deciding whether to slip in.
Telecoms giant O2, for example, is known to be interested in the idea of an IPO, but only when market conditions are favourable, according to its management. José María Álvarez-Pallete López, chief executive officer of parent company Telefónica, told The Times in August that “it would be a sizeable IPO, [which] would need attractive conditions, but it doesn’t look like the financial markets are ready”.
Another IPO candidate currently residing on the sidelines is litigation finance business Vannin Capital. In September, it announced its intention to list in the following month. The company sought a £70m primary issue and said it intended to use part of the IPO’s proceeds to repay a £27m loan and use the remaining money “for general corporate purposes and to support the group’s plans for growth”.
But just a month later, chief executive Richard Hextall confirmed that the company had had second thoughts. “Although the investor roadshow generated strong indications of support from a high-quality group of institutions, management has concluded that the volatility experienced recently in the equity market has led to conditions that are not conducive to an IPO, and that Vannin would be best served by postponing its proposed listing,” he said.
“We are under no pressure to list the company in the near term and prefer to wait until market conditions are more suitable.”
Market volatility did not, however, deter competitor Manolete Partners from announcing its decision to go public. At the time of writing, the litigation financier was set to list in mid-December and had raised £16.3m from placing ordinary shares.
Steven Cooklin, chief executive officer, said: “I’m confident that our IPO will act as the catalyst for accelerated growth.”
Investors have become more selective
While the volatility of global markets is undoubtedly affecting any decision over an IPO, the Chicago Board Options Exchange’s Vix indicator, which measures the expected volatility of the US stock market, suggests that things may not be as bad as they seem. In fact, volatility is currently low compared to its average across the year. The Vix currently sits at 16.8, compared with the 2018 peak of 41.5 back in February.
The longest bull market in history has been followed by a period of pessimism, according to Chris Beauchamp, chief market analyst at IG Group, who has recognised a shift over the past year from a “synchronised global growth story”.
“That is making life a lot more difficult for IPOs,” he says. With credit becoming less readily available, investors are thinking twice about putting money in high-growth companies “that are treading at what people might view as rather lofty valuations”.
Aston Martin and Funding Circle are arguably two such companies that have both found life on the stock exchange tough so far.
Luxury car manufacturer Aston Martin has actually posted some pretty strong figures since going public. Although it missed some analyst expectations, it almost doubled its revenues and nearly trebled operating profits in its first results as a listed company. But it has eye-watering levels of debt, and with the likes of George Soros and French fund Carmignac Gestion taking short positions, things may get worse before they get better.
Peer-to-peer lender Funding Circle’s shares, meanwhile, have oscillated since listing. The shares rallied 7 per cent following a positive third-quarter update, but difficulties in valuing the company owing to a lack of available data and the scepticism of some over its business model have left many investors sitting this one out.
A peer may be about to offer them another listing to pore over. Monzo, another financial services upstart, is rumoured to be on the verge of listing. The mobile bank recently completed a £20m crowdfunding exercise from its customers, and did not respond to requests for comment over a potential listing. Mr Beauchamp is watching Monzo closely, as the digital bank seeks to pitch itself “as a different animal to the high-street banks that exist”. A spokesperson for Monzo cooled speculation over going public anytime soon, saying that “an IPO is not on the cards or in the pipeline for the near future”.
But much like the ebullient AirX management, he recognises the potential disruption posed by the vast amount of “moving parts” of Brexit. While the process could end up passing smoothly, “I think it makes sense to avoid it like the plague at the moment”, he says.
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