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Investing in IPOs – why not let the experts do it for you?

If you like the idea of investing in IPOs but aren’t sure where to start, why not let the experts do it for you? Here are four investment ideas that could be worth thinking 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.

The stock market needs new blood to thrive and be home to the winners of tomorrow. When a company first lists its shares on a public stock exchange it’s known as an Initial Public Offering, or an ‘IPO’. This is normally the first chance for the general public to invest – but it isn’t the only opportunity.

Before floating on a stock exchange, a company’s shares are usually in the hands of its founders, venture capitalists or private equity firms. Going public gives the company an opportunity to raise more money to keep growing. But there are a few things investors should look out for.

There can be a lot of media attention and speculation surrounding IPOs. This can have a material impact on the demand, price and volatility of the shares being made available. If you’re thinking about investing in an IPO, you should consider the motivation behind this.

Is going public now in the company’s best interest for the long term, or does it look more like a good opportunity for existing investors to cash-in on their investment? It’s important to consider all the facts and whether it meets your goals and objectives just like any investment decision.

This article isn’t personal advice. Investments and any income they produce can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment or course of action is right for you, ask for financial advice.

IPOs on the rise

Companies new and old join the stock market every year, but so far this year markets have been buzzing with IPO activity. In fact, it’s been the busiest start to a year in over two decades, with over 720 IPOs globally in the first quarter of 2021 (January to March) alone. This is already more than half of the total for 2020.

Number of Global IPOs

Source: Dealogic, as of 31 March 2021. *To end of March 2021.

Why are companies turning to public markets now? The answer is different for each case.

Technology-focused companies have been popular and some of the busiest this year. Since the start of the pandemic, technology has been one of the best-performing sectors with consumers turning to digital solutions for their day-to-day needs. Whether it be for work, entertainment or healthcare, our reliance on technology doesn’t look like it’s fading anytime soon. With optimism in the air, lockdown beneficiaries have taken advantage of increased demand to go public.

Different ways to invest in an IPO

With lots of exciting businesses coming to market, it’s no surprise that interest has spiked, particularly among retail investors.

There are a number of ways to invest in IPOs. You could buy company shares directly like you can with any other listed company. Or you could invest in a pooled investment vehicle like a Special Purpose Acquisition Company (SPAC).

IPOs – what are they and what investors need to look out for

These are both viable options, but IPOs are higher risk as they can be tricky to value at first and they aren’t for everyone. It’s important that investors do lots of research, which requires both time and information. Time you might have, but information isn’t always easy to come by.

Sometimes it could be worth thinking about leaving it to an expert, like a professional fund manager to make the underlying investment decisions. They’ll usually have lots of experience and the right resources to decide if an IPO could be a good opportunity to invest.

Some open-ended funds and investment trusts invest in IPOs. Initially these often only form a small part of the portfolio. But over time they have the potential to increase, decrease and even be sold at the fund manager’s discretion.

The remainder will typically be invested in companies that are already listed or well-established, which helps investors diversify and spread risk. There might also be periods when these managers don’t invest in IPOs. It’s important to look at the merits and objectives of each fund before making an investment.

If you want to leave it to the experts, here are just a few from a number of managers who invest in IPOs that could be worth considering.

Investing in funds and investment trusts isn’t right for everyone. Investors should only invest if the investment’s objectives are aligned with their own and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund or investment trust before they invest and make sure any new investment forms part of a diversified portfolio.

The price of an investment trust can often differ from the net asset value (NAV). This is different to funds which will have a single daily price calculated by the provider. If the current share price is above the NAV, the investment trust is said to be trading at a premium – it costs more to buy the shares than the underlying investments are worth. When the share price is below the NAV, this is known as trading at a discount.

Schroder Small Cap Discovery

The Schroder Small Cap Discovery fund, managed by Robin Parbrook and Alexander Deane, invests in smaller businesses based in Asia and higher-risk emerging markets. This means it can take part in IPOs outside of the UK and other developed markets.

The managers are cautious when it comes to IPOs and mindful of the risks. They only invest when they have high levels of conviction in both the business model and management team.

IPO activity in this part of the world has been particularly busy and provided plenty of opportunities for the managers to uncover some hidden gems. Recently they invested in a number of IPOs like software-focused Ming Yuan Cloud, electric vehicle manufacturer Xpeng and healthcare company JD Health. The managers believe each company has good long-term prospects and stands out from the crowd.

They usually invest a small amount in IPOs with the aim of building up their investment over time. But with plenty of interest from other investors, the share prices of these three recent purchases soared. This helped fund performance, though the managers didn’t think this level of share price growth was sustainable and sold all three stocks. The managers continue to look out for new opportunities. It’s important to bear in mind that smaller companies are higher-risk and require a long-term horizon.

Annual percentage growth
April 16 -
April 17
April 17 -
April 18
April 18 -
April 19
April 19 -
April 20
April 20 -
April 21
Schroder Small Cap Discovery 30.7% 3.5% -3.1% -16.8% 52.5%
IA Specialist 22.9% 5.3% 2.8% -7.1% 24.3%

Past performance is not a guide to the future. Source: Lipper IM, to 30/04/2021.

Find out more about Schroder Small Cap Discovery including charges

Schroder Small Cap Discovery Key Investor Information

Artemis Global Income

Income funds don’t often invest in IPOs as these companies don’t normally pay dividends, at least to begin with. But Jacob de Tusch-Lec, manager of Artemis Global Income, does exactly that.

De Tusch-Lec and his team search the globe for companies they think can earn plenty of cash that can be used to pay dividends. As a natural contrarian he’s prepared to invest in areas others often avoid, including IPOs.

The manager only invests in companies making cash now, not loss-making businesses with future growth potential. They don’t necessarily need to be paying a dividend straight away though, as long as he thinks they will in future.

Unlike lots of other IPO investors, De Tusch-Lec tends to invest in mature businesses that have been previously owned by a government or were publicly owned but then taken private.

Following the European Debt Crisis of 2009, many cash-strapped governments sold part or all of their investments in various companies in order to raise money to reduce their levels of debt. Southern Europe in particular offered plenty of opportunities. Examples include the Portuguese national postal service, CTT – Correios de Portugal, Spanish airport operator AENA and Italian airspace control company ENAV.

That’s why it’s crucial to know who’s selling a business. De Tusch-Lec likens this to buying a second-hand car or an old house. How many owners has it had? Have they taken care of it and have they invested adequately?

Investors should be aware that the manager can use derivatives, and invest in high-yield bonds, smaller companies and emerging markets, all of which add risk.

The fund’s charges are taken from capital, which can increase income but reduce the potential for capital growth over time.

Annual percentage growth
April 16 -
April 17
April 17 -
April 18
April 18 -
April 19
April 19 -
April 20
April 20 -
April 21
Artemis Global Income 29.1% 5.4% -1.3% -14.1% 39.0%
IA Global Equity Income 24.5% 4.3% 7.9% -5.5% 26.0%

Past performance is not a guide to the future. Source: Lipper IM, to 30/04/2021.

Find out more about Artemis Global Income including charges

Artemis Global Income Key Investor Information

TB Amati UK Smaller Companies

TB Amati UK Smaller Companies is managed by a team of five who have plenty of experience investing in IPOs. They hunt in the smaller parts of the UK market for high-quality, financially robust and growing businesses. It’s important to remember that investing in smaller companies always involves higher risk.

IPOs will only be considered if they offer as much opportunity as listed companies. They invest in companies that have carved out a niche in a growing market. Recently they added tinyBuild to the portfolio which has done exactly that, providing a cost-efficient method of bringing game developers in-house.

They also like companies with the ability to disrupt the status quo, like Auction Technology Group, an IPO they purchased earlier this year. Having already built a strong presence overseas, the team believes the company has a long runway of growth ahead in their digitalisation of the traditional auction house.

The team carries out lots of research before investing. Where possible they participate in pre-IPO (also known as ‘early look’) meetings with management. They also speak with customers, employees and get to know competitors within the sector.

Annual percentage growth
April 16 -
April 17
April 17 -
April 18
April 18 -
April 19
April 19 -
April 20
April 20 -
April 21
TB Amati UK Smaller Companies 33.1% 24.9% 1.7% -6.6% 52.6%
IA UK Smaller Companies 24.8% 13.6% -1.4% -10.8% 56.6%

Past performance is not a guide to the future. Source: Lipper IM, to 30/04/2021.

Find out more about TB Amati UK Smaller Companies including charges

TB Amati UK Smaller Companies Key Investor Information

Mercantile Investment Trust

Guy Anderson, co-manager of the Mercantile Investment Trust, hunts for riskier small and medium-sized UK companies that have the potential to be the leaders of tomorrow. The UK is home to some great businesses and the pipeline of IPOs offers fund managers a way to invest early.

Before investing, Anderson makes sure he understands why a company is being sold and made public. Is a private equity firm looking for the best value they can get? Or is the company looking to fund their next stage of growth? The latter reason often offers a great opportunity to invest in a founder-led business focused on the longer-term outlook.

Anderson and his team have meetings with company management quite some time before they come to market. This allows them to get to know the company well in advance.

Anderson invests for the long term. Since joining the trust in August 2012, he’s invested in several IPOs that are still in the trust today. For example, in 2015 he invested in online automotive marketplace Auto Trader and IT infrastructure firm Softcat. In 2014 he invested in value retailer B&M, which has since grown its store count from around 400 to almost 1,000.

That said, he’ll sell shares if the opportunity no longer looks as good. This was recently the case with Dr. Martens, a stock he bought and then sold earlier this year after its share price quickly reached his valuation target.

The managers invest in higher-risk unquoted companies, which aren’t listed on a stock market, but these only account for a very small part of the trust. The trust also has the flexibility to use gearing which can magnify any gains or losses and increases risk.

Annual percentage growth
April 16 -
April 17
April 17 -
April 18
April 18 -
April 19
April 19 -
April 20
April 20 -
April 21
Mercantile Investment Trust 19.3% 13.6% 0.4% -5.0% 47.1%
FTSE All-Share ex FTSE 100 ex Investment Trusts 19.3% 6.4% -1.9% -17.7% 44.3%

Past performance is not a guide to the future. Source: Lipper IM, to 30/04/2021.

Find out more about Mercantile Investment Trust including charges

Mercantile Investment Trust Key Investor Information

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    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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