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The UK IPO market – what investors need to know

We dive into how the UK IPO market is shaping up at the moment, and what investors should think about.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

An IPO, or Initial Public Offering, is when a company lists its shares on the stock market for the first time.

The UK IPO market flourished last year, as vaccine rollouts increased optimism for a strong recovery to the economy. Accompanied with low borrowing costs and rising confidence in business in the UK, the IPO market raised £16.8bn in 2021 – the highest amount since 2007.

This year’s provided us with a different economic environment though. Multiple headwinds have impacted the outlook for companies wanting to go public and lots have delayed their IPO until conditions improve.

To understand more about IPOs, we recently looked at the IPO process works, how to invest and what investors should look out for.

This article is for people who understand the risks of investing in shares, it’s not personal advice. Investing in IPOs and individual companies isn’t right for everyone - it’s higher risk as your investment is dependent on the fate of that company.

All investments and any income they produce will rise and fall in value, so you could make a loss. If a company fails, you risk losing your whole investment. Investors should make sure they understand the companies they’re investing in, the company-specific risks, and make sure any businesses they own are held as part of a diversified portfolio.

Rising interest rates

Companies need a high valuation to justify an already expensive IPO process. Higher valuations amount to more money being raised at the IPO – a key reason for going public. One way of valuing a company is by predicting future earnings and converting them into today’s money. Interest rates play a key part in this calculation.

Higher rates, like we’ve seen this year, mean future cash flows are worth less today. That feeds into lower valuations, meaning the IPO process would raise less cash now than it would have last year.

So, there’s a decision to be made. Stick with the original plan and raise less cash or put a bigger chunk of the business up for sale – neither option is particularly attractive to the company looking to IPO.

Low investor confidence?

The success of an IPO boils down to how much investors are willing to invest in the first place. The recent lacklustre performance of the global economy has turned investors more defensive in their stock picking, opting for companies with strong earnings in the here and now. But remember, it’s important to take a long-term approach when you invest.

Low investor confidence can impact a company’s decision to IPO, as they weigh up if now’s the right time to raise money through the public markets. Alternatively, they may decide to raise funds through the private markets with the option of going public later.

Conflict in Ukraine

Timing is everything for an IPO, and heightened market volatility brought on from the conflict in Ukraine has made it difficult to value a company wanting to go public.

This essentially put the IPO market on hold at the start of the year. Without any clear signs of it coming to an end, upcoming IPOs could continue to be shelved until markets calm and the outlook shifts.

A closer look at the UK IPO market

Blockbuster IPOs on the UK stock market have been few and far between. From 2015-2020, the UK accounted for only 5% of IPOs globally. Apart from a few high-profile names in 2021, the UK’s struggled to attract exciting growth companies. These are companies expected to grow faster than others, that could deliver above-average growth as measured by factors like earnings, revenues, or cash flow in the future.

Instead, companies are opting to list on exchanges with a history of higher valuations and deeper pools of cash, like in the US. This hasn’t been helped by Brexit, where the exit from the EU casted doubt over the UK’s long-standing status as a global financial hub of the world.

In fact, the UK IPO market is on track for its worst first half performance since 2009, raising slightly above $0.8bn in proceeds so far this year. This reflects the global IPO market as a whole, which has witnessed a dramatic slowdown so far in 2022.

UK IPO Market: First Half IPO Proceedings ($ billions)

Source: Bloomberg, 30/05/22.

Almost two thirds of the UK companies that went public in 2021 are now valued at less than their IPO price. This is perhaps the biggest reason why companies are avoiding the UK market – a string of underperformance doesn’t bode well with founders of the business.

There’s another contributing factors to this drop in IPO activity. The recent exit of Prime Minster Boris Johnson has shadowed the UK economic outlook with uncertainty. Until a new leader is decided, the IPO market could remain underwhelming.

Changes to the UK IPO market

The decline in IPOs hasn’t gone unnoticed by the Financial Conduct Authority (FCA), the UK’s financial regulator. A new plan launched at the end of 2021 has simplified the rules of going public to attract more companies, something that’s not been done since the 1980s.

New changes allow companies to sell a minimum stake of 10% to the market, well below the previous 25% enforced by regulators. This offers an attractive proposition to founders, who typically own a decent chunk of the company alongside any early-stage investors. By having more control over how much they sell to the market, founders have more options to choose from when going public.

Another key focus centres on simplifying the two-tiered listing structure. Previously, a company could go public through a ‘premium’ or ‘standard’ listing. The premium carries the highest level of regulatory requirements and allows inclusions into the FTSE index, a luxury the ‘standard’ listing doesn’t have.

The new, simplified, version allows companies to list under a minimum set of requirements, leaving the decision to shareholders if they want the company to opt into a further set of obligations.

The success of this plan has yet to be seen and competition to attract companies is heating up. Once the global IPO market starts to recover, a key indicator for success will be based on how much money the UK is able to attract relative to its European and American counterparts.

What this means for investors

IPOs provide a great source of opportunities for investors and more and more IPOs are becoming accessible for retail investors to get involved.

As blockbuster IPOs remain halted in the first half of 2022, the pipeline for future IPOs looks strong. If economies get a commanding foothold on the rampant inflation and a recovery looks more promising, this could pave the way for more companies to go public in the future.

If you’d like to keep up to date with any upcoming IPOs, you could sign up to our email alerts.

Sign up now

Investing in IPOs does come with risks, though, and media attention will add to the hype as the company gets closer to the day of going public. It’s important to do plenty of research on the company and its competitors. This means reading the company prospectus to understand their financial records, projections for the future and an outline of risks. It’s the most useful tool in deciding whether or not to invest.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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