The last 12 months have been one of the best periods for Initial Public Offerings (IPOs) since the financial crisis began in 2007. Returns from newly-listed companies beat many analysts’ expectations and equivalent investor earnings from stakes in the FTSE-100. But can this performance be sustained into 2015?
In August last year, I hoped to see a steadier performance from some of the stock exchange’s newest entrants. Many of the market’s latest constituents found their share prices sliding for the majority of 2014, following a few IPOs which some commentators claimed over-valued certain businesses.
That hope seems to have come to fruition. Our latest research on the performance of IPO shares found that companies which floated on the public markets in 2014 offered a better return to investors compared with backing the FTSE’s incumbents.
As at December 31, the 30 IPOs that were completed in 2014 generated an average return of 12.4%, beating the FTSE-100 by 14.4% over the 12 months.
That means an investment of £1,000 in each of the 30 IPOs would have been worth £33,715 at the yearend. By comparison, investing the same amount in the FTSE at each of the IPO dates would have seen your initial stake of £30,000 drop to £29,388.
This is an encouraging result for IPO shares, particularly given the perception of them as a risky bet.
The best returns were to be found in June’s batch of 11 IPOs which between them generated returns of 32.2% - nearly triple the average for the full year.
Of the 30 IPOs, 22 were backed by private equity and generated average returns of 14.6% - significantly higher than non-private equity backed IPOs at 6.4%. This demonstrates that private equity-backed flotations are not just good for those exiting the business, but for new investors too.
After such a good year for IPOs, the question has to be whether this can be sustained over the next 12 months. The answer would appear to be yes, but that doesn’t come without its caveats.
There have already been a number of recent announcements from companies indicating their intention to float in 2015, albeit one of those, the trainline.com, has just announced its sale to KKR. Even so, there does seem to be confidence in the short to medium term. In addition, there is a decent pipeline in the longer term thanks, in part, to London Stock Exchange (LSE) initiatives such as the ELITE programme.
That could change, however, depending on events over the next few months. May’s General Election is a source of uncertainty for many businesses, while the risk of a rate rise from the Bank of England has been looming for some time. The Eurozone also remains weak and is a key market for many companies which might consider listing in London.
That being said, there are undoubtedly opportunities for new listings. The first quarter of 2015 could be the busiest for some time, if conditions remain right.
Are you considering listing on the LSE in 2015? Read my previous blog on how to make it a success or get in touch. Alternatively, if you have any views on investing in newly-listed companies leave a comment in the box below or tweet us on @DeloitteScot.