By Bob Huxford
One could be forgiven for thinking the UK might not have had the best year for IPOs in 2020. Lockdown measures caused the economy to suffer its biggest fall on record between April and June, down 20.4% on the prior quarter and, aside from a brief respite, we’re still on lockdown now.
However, 2020 wasn’t actually that bad for IPOs and was a great year for fundraisings. There were 43 IPOs on the LSE raising a total of £9.4 billion. Taking secondary raises into account this number moves up to £51.2 billion, making 2020 the LSE’s best year since 2009 for capital raised. This was 2.8 times that of Europe’s next best performing exchange, Frankfurt at £18 billion, and the 635 total transactions were 2.7 times that of Europe’s next most active exchange, Stockholm, which managed 231 IPOs and secondary raises.
Of course, with the pandemic disrupting many businesses and even halting the operations of some, access to funding was of prime importance to ensure many businesses could continue to thrive, and in some cases survive.
This is one reason one might expect to see increased IPO activity in 2021. One of the prime motivations for seeking a public listing is to provide access to funding, and this facility has likely never looked more attractive than during this pandemic. It won’t have escaped the attention of many business leaders who struggled through 2020 that, as well as providing access to funds for growth, an IPO can act as a form of insurance against future unforeseen crises.
Another reason is pent up demand. The IPO conveyor belt has been picking up pace since the summer, as work resumed on flotations that were paused during the first lockdown. In addition, business leaders that were mulling an IPO but put off plans owing to the pandemic may well be feeling more confident with the vaccine roll-out now well underway. There are plenty of companies that are at the right size to float at the moment, having taken advantage of the greater availability of early-stage financing in the UK over recent years. The UK has made 82 unicorns (start-up companies valued at over $1bn) since 1990. More than any country outside of the US and China.
A further reason for a potential increase in IPOs is the clear success of those that listed in 2020 with their share prices up 18.8% on a market capitalisation weighted basis. Of companies that floated on the main market in 2020, 68% of them are trading above their listing price. Flotations on the Alternative Investment Market (AIM) are faring even better with a full 83% of them ahead of their issue price. Performance like this is sure to increase investor appetite for new issues.
Amongst these have been some real success stories. Immunodiagnostic company Verici Dx has enjoyed a 307% share price rise since floating on November 3rd; Scottish software testing company Calnex Solutions is up 142% since it listed on 5 October; and Newgate’s own clients, including textile innovator HeiQ and online fraud protection business, Brandshield have seen their shares increase 60% and 35% respectively since admission.
This growth in valuations is being supported by a number of factors including ultra-low interest rates, a rapidly growing money supply and, of course, the high-quality of the companies that have listed in London in the last year. Innovations from the LSE have also helped: the SSE LSE Stock Connect initiative allows the Chinese to invest in UK stocks and vice versa; and Primary Bid is an app-based solution enabling retail investors to take part in primary and secondary raisings. A timely service given the lockdown-induced increase in retail investment – what else is there to do with your money?
It’s no surprise therefore that Marcus Stuttard, head of UK primary markets at the LSE, has been quoted as seeing a stronger pipeline for IPOs in 2021. The bootmaker Dr Martens is expected to float next week for £3.5 billion. Another household name is online greetings card seller Moonpig, expected to release its IPO prospectus later this week, ahead of a potential £1.2 million float. This follows off the back of the success of another e-commerce business in The Hut Group which floated at £5.4 billion last September and is now valued at £7.2 billion, up 33%.
Tech-enabled businesses are featuring particularly strongly, potentially driven by the pandemic fuelled acceleration toward digitisation. The LSE’s Senior Business Development Director for the Technology Sector, Neil Shah, is expecting more technology flotations in the first six months of 2021 than for the whole of last year when there were eight and one reverse takeover. Taken together they are also expected to raise more money than the combined total of the 2020 technology floats.
UK tech-enabled businesses looking to join the London market in 2021 include online delivery service Deliveroo, expected to float for over £5 billion, AI Cyber-Security business Darktrace for £3.8 billion and fin-tech pension consolidator Pensionbee at £300 million. Not all are domestic either with Danish review website Trust Pilot looking at a mooted £775 million valuation and Seattle based games developer Tiny Build also planning a London float for circa £300 million.
Moving away from technology, but potentially outstripping all of these, is the expected flotation of Europe’s largest veterinary business, IVC Evidensia. Based in Bristol the Group has over 1,500 veterinary practises operating in 11 countries and could be expected to achieve a valuation of £10 billion at IPO.
For an indication of the appetite for IPOs one only has to look over the pond. The US IPO market saw huge listings in 2020 with Airbnb ($47billion), Doordash ($32 billion) and Snowflake ($33 billion), the biggest pure software IPO ever. Activity in the US appears to be gathering pace as well. The first two weeks of 2021 saw the IPOs of 52 SPACs (Special Purpose Acquisition Companies), more than in the whole of 2019.
As outlined by my colleague Tom Carnegie in a post from 14 January, the LSE is seeking to become more competitive in order to lure some of these mega-sized IPOs to these shores. The valuation gap between the UK and US has already been greatly reduced and a potential softening of the regulations, such as reducing the required free float, could make London still more attractive. Either way, 2021 looks set to become an excellent year for UK IPOs.