31st March 2014
Investors who buy into an IPO will see their returns oustrip the wider market, says Capita Asset Services.
The firm has analysed 10 years of UK IPOs and suggests that in their first month, new listings outperformed the FTSE All Share 7.0% on average. After 6 months, they are 11.5% ahead. After a year, the average listing has outpaced the index by 10.5%.
It also suggests that the first day bounce is worth 5.7% generally outperforming the market by 5.4%. It says that on the first day of trading, investors stand a 70% chance of seeing a price rise.
Some 70% of companies analysed, ended their first month of public trading with greater gains than the FTSE All-share, while a majority (53%) still outperform a year on.
Over the longer term, while the probability of a company outperforming the wider index inevitably falls, the gains made by those that outperform outweighs the losses by those that see worse growth than the FTSE All-Share. 57% of companies see slower growth than the index after two years, although across the board, there is an average outperformance of 7.6%.
The firm says that five years out from the IPO, the trend persists, although the number of companies outperforming the market falls to a third (32%), on average there is still an outperformance of 3.7%, even accounting for companies that went into administration or were bought out.
Justin Cooper, CEO of Shareholder Solutions at Capita Asset Services, said:“Our research shows investors should be confident about buying into new issues, as long as they do their homework. Pricing is paramount. Leaving too large an upside for investors suggests companies have undersold themselves, which can be very politically sensitive if the owner is the taxpayer, as the Royal Mail example shows.
“On the other hand, overpricing means a bad start for the stock, alienating investors from the outset; a bad way to kick off your investor relations campaign. Broadly, companies seem to have been getting it right – even through the turmoil of the last few years. Over the longer-term, beyond the usual holding period of a typical institution, the IPO bounce subsides, and the chance any individual stock will continue to outperform reduces. But this is the same with any share, so investors must keep their portfolio under review.”
Capita’s research team analysed 10 years of available share price data for IPOs that have taken place on the London Stock Exchange’s main market since 2004. Data was taken from Yahoo Finance, FactSet and LSE, incorporating figures from companies that are no longer listed following their IPO. Investment trusts and similar instruments were excluded from the findings.