A staggering £9.2Bn has been lost by investors over the last five years, simply by believing the marketing nonsense of IPOs.
The UK IPO market is in the doldrums, reaching a 11-year low.
SCM Direct conducted a comprehensive analysis of the pitfalls of investing in Initial Public Offerings (IPOs) on the London Stock Exchange (LSE) over the last five years. Despite the marketing hype and so-called expert valuations of these issues to the public and institutions, they rarely live up to their outlandish promises.
Our analysis of 216 IPOs listed on the LSE over the last five years (some of which have become bankrupt or suspended) amount to a total of £25.8 billion being raised, but with total losses £9.2 billion. The average loss for investors per pound raised was a staggering 36%.
One of the most surprising findings is that the largest floats gave investors no chance. Maybe because these involved are even more lavish with their ludicrous valuations to win the lucrative mandates. Every single one of the 10 largest IPO’s in the UK lost investors’ money – in fact these top 10 raised a combined £11.4 billion of which more than a half went down the plughole.
One of the most amazing IPO’s last year was CAB Payments, the cross-border payments and foreign exchange provider across emerging markets. Its shares were offered at 335p a share, they are currently just 80p, losing investors 76%, so far. That’s £220m down the IPO lughole as it managed to have a major profits warning not long after listing.
It is of course fair to say that the global IPO market has not fared much better. A good measure of how IPO’s have performed in the US is given by an ETF (Renaissance IPO ETF) that invests in a portfolio of newly public companies – Its success or failure seems to be tech on steroids – up 35% in 2019, up 108% in 2020, then down 10% in 2021, down 57% in 2022 but up 53% in 2023. But despite this choppy ride, the 5-year return in the US is positive at +63% - vastly difference to the performance of UK IPO’s.
It is not surprising that in the UK there seems to be a buyers strike. Whilst the UK stock market has underperformed in the last five years, it has not experienced a decline of a third, emphasising specific challenges associated with IPOs in London.
These findings pose the question of whether the FCA should (under Government pressure) spend less time on relaxing listing rules and more time ensuring confidence by bringing in robust requirements for forecasts, marketing literature, and ‘independent’ valuations that surround such floats, so investor trust is restored. Not to mention addressing the demand side of the equation – encouraging through tax incentives, UK investors to buy UK shares.
Be it Brexit or the sharp and seemingly permanent devaluation of sterling making UK-listed firms’ easy prey for cash-rich US private equity, there is an urgent need to repair the reputation and valuation of UK shares. It is better to face reality rather than stick your head in the sand like the LSE CEO who claims that London listed companies do not trade on a discount. This is patently nonsense - the truth is that UK stocks on almost record discounts to their international peers. It is 40 years since the launch of the FTSE 100 in January 1984. The performance versus other markets has been dire, but much of this gap has been over the last 5 years thanks to the UK having very little exposure to tech stocks, and Brexit making investors apply a discount on top. The Evening Standard comprehensively proved UK shares stood on a wide discount in April this year – since when the gap between UK equities and overseas markets has widened, making a gap become a chasm undetected by the LSE.[2]
A better approach would not be the relaxation of the listing rules to set the bar even lower, but to raise the bar by having more quality controls on these IPOs. Many of the projections and statements within IPO’s over the last few years have been, at best, economical with the truth. In addition, the Government should give extra tax incentives for personal and institutional investors when investing in London listed shares, which would increase demand to existing and new listings. At present, pension funds have less than 10% of their assets invested in UK equities, compared to more than 50% in 1990. In fact, the pension fund that invests on behalf of Britain’s MPs and ministers, has just 1.7 per cent invested in UK-listed companies.
Surely, its time for the Government, the regulators and most importantly the LSE to stop deluding themselves that simply relaxing listing rules is the solution to the UK discount and the UK IPO drought.
