The stock market now has some interesting features, some of which have not been seen before in my time. At the moment, I am being bombarded with a volume of what were once called ‘New Issues’ or ‘Flotations’, but are now badged as ‘IPOs’, or ‘Initial Public Offerings’. A term we appear to have imported from Wall Street, just as CEO (Chief Executive Officer) has replaced the Managing Director in Britain.
So why are we seeing such a tsunami of Companies seeking a stock market quotation, so that the volume is swamping meetings with existing quoted companies? There are many reasons, several interrelated. First, there has been pent up demand from the start of the pandemic. After all, no company could float in March 2020, given the uncertainty meant management had no story to tell. Secondly, corporate brokers are keen to stimulate the high fees that New Issues generate after a fallow period. A third reason is that Companies too are opportunistic and see the present time as being receptive to their prospects. Fourthly, the investment industry is currently confused about the long-lasting impact of the pandemic. Many consumer habits may have changed for good, such as more online shopping, but in several others the change may be temporary.
Many of the New Issues being seen have been beneficiaries of the pandemic and management’s assurance that those benefits will stay and grow is questionable, particularly when the flotation is at a very high multiple that does not reflect that risk. A good example being the recent Deliveroo IPO at 390p per share and which now trade 20% lower. Another high-profile trend is the increasing presence of Private Equity (PE) in business transactions. Perhaps the most familiar example being the £6.3bn bid by Fortress for supermarket chain Wm. Morrison. We know that supermarkets have done well during the pandemic as other retailers had to shut and many have even made home deliveries profitable. So why has PE alighted upon Morrison? Most likely it is because it has the highest level of freehold property amongst the major supermarkets. Indeed, over 80% of its stores are reported as freehold. That will make an enticing sum on any disposal to leave the main supermarket business at a very cheap net price. We have not heard the last of this bid, with a bidding war quite possible and even MPs taking an interest in the situation.
Private Equity has a reputation for extracting value from quoted and private businesses, increasing debt significantly and later on looking for a profitable exit. Currently, a most popular exit is through a stock market listing during the present tsunami of IPOs. I would say that I have not seen so many IPOs that I can remember, where stock has been sold entirely or partially by Pes. Acquisitive quoted companies are consistently telling me that their main competitors in the acquisition of private businesses is now Private Equity. Certainly, the main fact that makes the PE business model so effective is the low cost of capital, which means that gearing a business is really cheap. Indeed, the only consideration for a private company seller that would make a sale to a quoted company preferable is in cases where the prospects for staff and the longer-term future of the business are paramount. Certainly, PE holds lots of cards in terms of price.
Inflation is another current topic. The authorities in the US, UK and Europe all say do not worry, it is temporary. I am not so sure. Consumers have lots of savings in many cases. Supply chains are disrupted and the expected unemployment due to the pandemic has not materialised. Indeed, there are labour shortages in most countries. If the authorities have got this wrong and interest rates must rise, then the halcyon days for Private Equity may be shorter lived than expected and IPOs less frequent.