Old Mutual’s Nickols: A livelier IPO market

Dan Nickols 450

Back in April of 2011, I wrote on this website bemoaning the state of the UK IPO market, arguing it was at that time dysfunctional for a number of reasons: pricing was too aggressive, syndicates were unwieldy and the flow of IPOs was simply too thin to propagate a healthy refreshment of the UK small and mid cap indices.

I suspect good news stories may to some appear dull, but happily, a lot has changed for the better.

As equity markets have generally recovered and volatility has declined, sentiment has clearly improved, encouraging both buyers and sellers to participate more actively in the IPO process.

Sellers’ pricing aspirations have clearly become more realistic. Over the course of 2013 to date a number of IPOs – Countrywide, esure, Hellermann Tyton, Partnership Assurance and Al Noor Hospitals – have gone to healthy premiums in the aftermarket.

This suggests that sponsors have become more responsive to the concerns that many investors were expressing a couple of years ago and are now engaging at an early stage in the IPO process to ensure that prices are set at levels which give an issue a strong chance of being covered.

Things could be better – I’m still of the view that syndicates are too large: from a company’s perspective, this strikes me as wasteful as there are mouths that are being fed that are arguably not adding any value over and above what a leaner syndicate could achieve.

From an investor’s perspective, one of my major gripes with bloated syndicates is that too many sell-side analysts are barred from expressing an independent view, which I consider unhealthy. It’s my impression that the message from the buy-side is filtering through that ‘less is more’ when it comes to putting together syndicates, and they are showing signs of being slimmed down.

So, the IPO scene is far healthier now than was the case a couple of years ago. Moreover, the immediate future looks promising too, with a range of interesting companies, such as Ibex and Keywords, in the process of floating. If press reports are to be believed, others are actively considering coming to the market, with Foxtons and the Royal Mail being amongst the most prominent examples.

Let’s hope that the momentum is sustained – as it must be to everyone’s advantage for this to happen – capital is applied (let’s hope efficiently!) to help develop companies and the wider economy, and, with an eye to the future, there will be more companies – more raw material – for the investment community to get its teeth into.

Daniel Nickols is manager of the Old Mutual UK Smaller Companies fund