David Buik: IPOs – maybe time to pause for reflection?

When I first came to work in the City in 1962 for Philip Hill, Higginson Erlangers, the aggressively progressive merchant bank of the day, whole page ‘offers for sale’ appeared in every broadsheet almost on a daily basis.

In yesteryear they were referred to as new issues; today they are called IPOS.

Generalising these opportunities offered tantalising rewards; it was money for old rope with virtually a 10% locked in profit with no CGT! Investors submitted their pink forms and until the great days around the BT float in 1984 some sort of allocation was guaranteed. There were rich pickings from IPOs and privatisations throughout the ‘80s and ‘90s all the way through to 2000, when the technology crash manifested itself.

Since then investors have quite rightly become cynical and very much more street wise, Also, ‘private equity’ has become virtually omnipotent in terms of taking advantageous stakes in companies and selling them on either as an IPO or to another trade buyer.

Since the days of the credit crisis and until the start of this year the fayre on offer in terms of floatation, IPOs or corporate funding has been limited, very competitive with investors adopting a rather more discerning attitude.

However since last autumn, triggered by the Royal Mail jamboree, this market has had plenty of momentum behind it. We have seen a slew of large share sales in the form of Lloyds Banking Group tranche valued at £6 billion and IPOs; many on line retailers such as Ao.com, Poundland and Pets at Home with B&M Retail waiting in the wings.

Their respective performances have been variable. Unconditional trading in Saga is expected to start on May 29, market conditions having forced a lower than expected issue price of 205p. At 205p, the earnings ratio would be nudging 16 times earnings – an attractive proposition provided sentiment remains upbeat.

In the weeks to come TSB and Williams & Glyn Bank are also expected to take their bow at the sacrificial altar of public ownership. We may now be entering a temporary saturation zone for investors.

The summer is upon us. Many equity markets are beginning to look fully valued with little in the way of a ‘good news’ flow. Also there is little evidence that company results going forward are going to really titillate investors’ taste buds.’

Though the outlook for the UK economy looks very bright virtually on all fronts, there is a limit to what investors can be expected to support. Asking them to return to the well with monotonous regularity without a really appealing growth story is surely unrealistic.

There are two issues that really bother investors. Firstly one has to respect ‘private equity’ and their enormous influence. In the same breath when they appear with an indecent level of enthusiasm to sell their stakes in companies they have nursed more often than not by way of an IPO, one has to ask the question – why?