The UK stock market originated some time around the late 1600s – you have probably heard stories about tulips or the East India Company. The US followed in the late 1700s, and both were relatively informal to begin with. Both became more structured and more formalised with the introduction of recognised exchanges in the early 1800s.
Volumes were low to begin with, and a lot of the trading was in government bonds. The US stock market only really took off either side of the turn of the twentieth century with the listing of railroad, oil and steel companies. This was the likes of the Rockefeller, Carnegie and Phipps families, the people that “built” America with family-owned companies who wanted an exit and to monetise the fortunes they had made.
I say all this because IPOs are about to hit the headlines again after a relative lull in the last few years. SpaceX is likely to be the biggest IPO ever at over a trillion dollars, perhaps in the second half of this year. Some of the well-known AI and fintech names such as OpenAI and Stripe are also looking to IPO with eye watering numbers.
The IPO market has been subdued in recent years and hasn’t recovered post-Covid, but the recent history has been mixed. Klarna has a US listing from late last year which has fallen about 70% in a fairly straight line since.
CAB Payments listed in the UK in July 2023. Barely three months later in October 2023 it had a profit warning and fell over 70% in a day. It has recovered somewhat from the lows of that day but has never been back anywhere near the IPO price.
Although slightly less recent, the one that I get really worked up about is Aston Martin in the UK, now down 99% since listing in 2018 – a straight up disgrace in my view. It has never made any money at the net income line as a listed company and has made minimal amounts of free cash flow.
In the UK in particular the IPO market has not been attractive for some time. Allocations in new issues tend to be concentrated in a small number of large institutions and there is often not much support in the secondary market. Unlike in other countries, retail investors tend to be a small part of the market and don’t get much access.
In a previous job we used to buy Japanese real estate investment trusts (J-REITs). The J-REIT market is relatively small, and they were keen to expand it, including with foreign investors through regular public equity raises. This was mostly pre-Covid, and the numbers have probably changed but there was about 65 or so listed J-REITs and maybe 50 of them were large enough to come to London and raise money. Many of them did this annually (some of the larger ones even in a regular slot in the same week every year) so there was an average of let’s say one per week.
The broad investment strategy at the old place was to buy assets at a discount. The rule for the J-REIT equity raises was they came at a 2.5% discount to the closing price on the day of the deal, so we used to buy them all, without fail. They would always be heavily oversubscribed and being a good client in this way helped us get allocations.
There was also a rule that no one was allowed to short the J-REITs ahead of the deal (you would normally expect the price to fall while this was happening). We sometimes used to wonder if this was enforced or if it was even possible to enforce it, but the rule was there.
From memory I did about 150 of these over the years and we lost money exactly twice. Once in Covid – the deals took 2-3 weeks to close and one happened either side of the start of the first lockdown, and once in an IPO rather than a follow-on offering. This meant the usual market rules did not apply and there was also a lower than expected take up from domestic Japanese investors. Without this support the price fell.
The market rules – the 2.5% discount and no shorting – are not of course intended for us. They are for domestic Japanese retail investors to give them some protection and confidence in the market and to show them it is a safe place to put their savings.148 out of 150 isn’t luck. The Japanese market provided support for both the funds and their investors, and it worked.
In the UK we do no such thing. The UK market is heavily regulated in terms of documentation, governance and disclosure, but when it comes to the price and valuation you are on your own.
Again, we return to this theme of the health and attractiveness of the UK market to investors. Encouraging a better IPO pipeline would be one potential improvement. A lot of companies have disappeared from the market due to M&A, plus some re-listing overseas and these are not being replaced with new ideas. Potential UK IPOs like Revolut would probably prefer the US.
You can see from the size of SpaceX that the US market has changed. Many of these companies are staying private for longer. There are many reasons for this, but private owners wanting to retain value is one.
This isn’t limited to the US although the numbers are smaller elsewhere. IKEA, Aldi, Lidl to name a few. None of these are going to space, but have stayed private.
I had a call from a head-hunter once – honestly this is a while ago – saying that IKEA were hiring, and someone had recommended they talk to me. I was extremely confused about this on many levels and was surprised to find out that IKEA has the equivalent of its own sovereign wealth fund. Again, this is pre-Covid and may well have changed by now, but I was told the operating company generates about €2bn free cash flow every year and has done for some time.
It is still family owned and so this money goes into a wealth fund which is split between private equity and a more traditional balanced fund, roughly similar to what Hawksmoor does. IKEA is not listed and this is unlikely to change any time soon as it has no real need to and is clearly an extremely valuable asset.
Similar to when you trade houses it is the seller who pays the broker, and while a buyer is obviously needed to complete the trade, it pays to bear this in mind if you are the buyer. You can still get a mutually beneficial deal and be very happy living the rest of your life in your new house, but the stock market – like estate agents – is primarily a selling machine.
Robert Fullerton – Senior Research Analyst
FPC26700
All charts and data sourced from FactSet
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