After a lean 2020, hopes were high that 2021 would be a better one for the London IPO market. In the end it’s been a mixed year, with IPOs for the likes of Moonpig, Dr. Martens, Deliveroo, Darktrace, Alphawave, Wise, Bridgepoint, and Oxford Nanopore Technologies enjoying varying degrees of success. This is partly because – in contrast to the US, where every company with a pulse seems to attract an extraordinary valuation – investors this side of the pond seem to have a more discerning eye.
This brings advantages, but there are also downsides as it becomes more difficult for companies to get their valuation and communication strategy right. Poor messaging and lack of clarity over the identity of three “anchor investors” were among the reasons why Deliveroo’s IPO flopped in March. The company’s shares suffered an opening-day drop of 26% from their 390p IPO price, with some observers calling it the worst IPO in London’s history.
It’s a lesson Deliveroo appears to have learned, as its shares returned to their IPO price in August, though they have since slipped again. In contrast, THG shares soared after the company’s 2020 IPO, but have come crashing back down to earth amid speculation that THG could be taken back into private hands.
Nevertheless, 2021 has not been a bad year for the London market. There have been notable successes, like Darktrace. However, we’ve seen London once again overshadowed by the US, particularly when it comes to the popularity of SPACs. A Special Purpose Acquisition Company, also known as a blank cheque company, is a publicly listed shell corporation funded by investors with the aim of acquiring a private business, thus making it public without the expense of an IPO.
SPACs were in the spotlight this year, with Cazoo and Nextdoor both taken public by SPACs. Cazoo was taken public by AJAX I, with the company raising $1.6bn, and valuing the business at $7bn. Nextdoor, the neighbourhood social media app, was taken public by Khosla Ventures, raising around $686m, at a valuation of $4.3bn. However, the jury remains out on how investable some of these companies are, given that the levels of transparency required when it comes to due diligence aren’t as rigorous as they would be for an IPO listing.
UK IPOs: And the winners were…
Among the winners in London’s IPO market, the stand-out performers were Darktrace, Dr. Martens, Bridgepoint Group and Oxford Nanopore. Shares in these four companies are trading above their IPO prices.
AI cyber security company Darktrace got off to a flier, partly because its final IPO listing price was lowered after Deliveroo’s disastrous float a few weeks before. There was some nervousness around Darktrace’s associations with former Autonomy CEO Mike Lynch, who is a founder member of Darktrace through his Invoke Capital fund. Lynch was on trial for fraud as part of his involvement in Hewlett-Packard’s purchase of Autonomy, and was fighting extradition charges to the US over that deal.
On page 10 of Darktrace’s IPO registration document, which is available on the company’s website, management warned that Darktrace could be charged with offences as part of the fallout concerning Lynch, though they describe the prospect as remote. Even so, this was hardly an ideal backdrop for drumming up interest in what has turned out to be an exciting investment proposition. Despite this, the shares have done well and have ended up in the FTSE 100 – not a bad start for a company that has been public for a matter of months.
Bootmaker Dr. Martens was fast out of the blocks, as its shares, which priced at 370p initially, traded above 400p on their debut. The stock climbed to 510p in early June, as private equity owner Permira, which bought the brand in 2013, sold some of its own stake, with no proceeds going back to the business.
Private equity company Bridgepoint Group also enjoyed a decent start to life on the UK stock market, listing at 350p a share. The company has investments in Hobbycraft, Fat Face and recently bought a stake in fast-food chain Itsu in June. The company currently has €29bn of funds under management and a presence across the US, Europe and China. It recently reported half-year revenue of £122.2m, a 55% increase year-on-year.
Another exciting opportunity was Oxford Nanopore, which raised £350m at an offer price of 425p, while some of its existing shareholders also sold portions of their holdings. The company supplies rapid Covid-19 tests to the NHS, as well as providing the technology to help spot and track coronavirus mutations. The company has also partnered with Oracle to explore new solutions using genomic sequencing, which would run on its cloud infrastructure on a global scale.
We also saw e-card and gift business Moonpig get off to successful start, pricing at 350p and raising £491m, with investor interest helping to drive the shares up 29% on its debut.
Wise Group, formerly TransferWise, initially traded at a premium to its 800p direct listing price, peaking in September at 1,175p, however it has slipped back since then, drifting below 800p earlier this month. Investors sometimes favour direct listings over IPOs for the simple reason that the company isn’t looking to raise new capital, but simply widen its shareholder base and make the shares more tradeable. A direct listing is also cheaper than an IPO and tends to be pursued by companies that already have strong brand recognition. Additionally, direct listings don’t have lock-up periods which means new investors don’t face the prospect of existing investors cashing out in the wake of an IPO boost. Spotify and Coinbase also went down this route.
UK IPOs: The wooden spoon goes to…
Toronto based tech chip IP company, Alphawave, was a letdown. Priced at 410p, the shares slid sharply on their first day of trading and have continued to do so. The company raised £856m, selling 360m new shares and listing around 28% of the business. The company said it might use the proceeds to open a new headquarters and R&D centre in Cambridge as part of its overseas expansion. The business, which licenses its technology to other chip manufacturers, saw its share price slide even further in September on concerns over the transparency of some of its business relationships.
However, top of the flops was Deliveroo. As mentioned above, Deliveroo’s IPO flopped for a variety of reasons. In addition to the factors already discussed, its valuation was too high for a company with a dual class structure, the business wasn’t profitable, and investors snubbed the listing over Deliveroo’s employment practices. Fortunately, it has been able to turn around some of these concerns, signing deals with Amazon (which has a 16% stake in the business), Morrisons, Leon, Chipotle, Starbucks, and Costa, but it’s likely to be a long road back.
US IPOs defy fundamental analysis
Over in the US, we’ve again seen valuations that, in some cases, bear no relation to the underlying fundamentals.
Not only has it been a record year for IPOs but globally we’ve seen over 2,800 businesses raise more than $600bn, blowing the previous record, set in 2007, out of the water.
The most notable and high-profile IPO was electric vehicle startup Rivian Automotive, which has the backing of Amazon and Ford. Despite having no discernible revenue to speak of, Rivian saw its shares surge from the initial $78 IPO price to $179 in the first week of trading, pushing it above the market caps of the likes of Ford and Volkswagen. The stock has slipped back a little since then, but the company still has a market cap of more than $100bn, which, for a company that is so far from turning a profit, represents a huge bet on its future prospects.
Other notable IPOs have seen companies take advantage of the online trading boom in cryptocurrencies and meme stocks. Online crypto exchange Coinbase surged out of the traps with its direct listing in April, seeing huge amounts of volatility on its opening day. Opening at $381, well above the $250 reference price, Coinbase’s shares peaked at $428, before closing at $328. They slid to $209 in May before rebounding on the back of a recovery in Q2 revenue, which rose to more than $2bn. While revenue fell to $1.31bn in Q3, the shares have continued to advance, despite concerns over tighter regulation. Monthly users also fell in Q3 to 7.4m, down from 8.8m in Q2, while trading volumes declined to $327bn from $462bn.
Robinhood Markets has also been a big winner from the online trading boom, and was a key component behind the wild moves in GameStop and AMC Entertainment in January this year, which burnt a lot of short sellers. There was a huge amount of hype around Robinhood Markets’ IPO in July, with many investors hoping that it had resolved the liquidity problems that brought it to the attention of US lawmakers. Priced at $38 on debut, the shares slipped back before rising to $85 in intraday trading in early August. However, the shares are now valued at less than $30, as the trading frenzy earlier this year subsided. The company’s Q3 revenue came in at $364.9m, well short of the $423.9m estimates. Crypto revenue fell to $51m, down sharply from $233m in Q2. The drop in crypto revenue is a particular worry given that several coins have recently hit record highs. After all, if people don’t trade amid news that bitcoin is surging in value, when will they? Losses came in at $1.32bn with the company warning that Q4 revenue could be even lower at $325m.
Meanwhile, there were IPOs from vegan dairy startup Oatly and Jessica Alba’s Honest Group. Expectations around their ambitions were high, which likely inflated their valuations at launch. This may partly explain why we’ve subsequently seen declines in the companies’ share prices. Oatly has had a shocker in the past few months. Coming to market with a valuation of $10bn and a share price of $17, the startup was being compared to Beyond Meat, which saw its share price surge out of the blocks when it went public in 2019. Because of Oatly’s popularity in the US, hopes were high for a successful IPO given its high-profile celebrity backers, including Jay-Z, and the fact that the global market for milk alternatives has a value of $18bn. Unfortunately, it also has stiff competition in this area in the form of Danone-owned Alpro. However, with brands like Starbucks carrying its products, the outlook appears positive, although whether it justified a $10bn valuation was another question entirely. For now, the answer appears to be no, given that the company has yet to make a profit, losing $60m last year alone.
Jessica Alba’s Honest company also saw its shares jump out of the blocks, listing on the Nasdaq at a premium to its IPO price of $16, raising $412.8m as it closed up near $23, giving it a market cap of $2bn at the time. The post-IPO bounce did not last with the shares now down below $10, with the company facing a class-action lawsuit on the basis that management allegedly lied about its prospects going into the Covid-19 pandemic when it filed its IPO. The company, which promotes and sells sanitary, cleaning and beauty products that are safe and eco-friendly, saw net losses in Q2 increase to $20m, with revenue falling short at $74.6m. In Q3 revenue improved to $82.7m, but concerns about higher margins appear to be weighing on the share price.
Picking winners akin to a guessing game
To summarise, while it’s been a record year for new companies coming to market, the stock market performance of those companies has been hit and miss.
You would think that the companies with decent underlying fundamentals would have done better than the ones with less robust fundamentals. Judging by the performance of companies like Rivian, nothing could be further from the truth. While some companies have had successful IPOs this year, this appears to be based on whether or not they are trendy, rather than on the resilience of their finances.
Another challenge for investors is identifying the motives behind a listing. Sometimes early investors in companies coming to market can ramp up the valuation of the business in order to take profit on their early investment, leaving other investors to weigh up the risks of jumping on the bandwagon.
As such it makes picking a winner more akin to throwing a dart at a dartboard while blindfolded. You might hit the bullseye, but you’re probably more likely to miss completely.