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FOCUS 13 THE DIFFERENCE ILLUSTRATES THAT
INVESTORS ARE BECOMING INCREASINGLY SELECTIVE IN THEIR ASSESSMENT OF WHICH LISTINGS TO SUPPORT.
The mood is apparently changing, as investors have seen poor performance from those listed against the FTSE General Retailers index which has remained broadly stable since January 2013. While Convivality and Bonmarché have maintained their post-listing peak, almost all the other retailers have seen a signifi cant drop-off in share price (either from post-launch peak or to fall below their initial offer price). The poor performance of the retail IPOs does not however refl ect the sector’s main index which points to a different set of drivers (underpinned by improving economic outlook and signs of rising consumer confi dence).
The difference illustrates that investors are becoming increasingly selective in their assessment of which listings to support. Contrary to some commentary, the IPO market is not closed, but it is crucial that companies continue to ensure careful planning throughout the IPO process to sustain value post- transaction and maintain support from a stable and long-term shareholder base (i.e. do a better job of underpinning the launch/immediate post- launch valuation).
It can be argued that current sentiment is being driven by the return/valuation requirements of the exiting owners, which raises questions
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about how these businesses are being brought to market. The challenges being faced are linked to elements within the control of the ‘sellers’ and, unsurprisingly at the top of the list of priorities is the launch valuation. The subsequent fall in share prices is that a number of the retailers have been overvalued at launch with the listing strategy designed to maximise the initial valuation (i.e. is the book running process targeting the right long term investors or seeking to address a short term fi x?). For a full exit, this may be a rational strategy, but for partial exits, the reputational impact of a declining share price and a falling value of the retained stake is likely to create further issues (such as leaving the PE house with only a partially delivered exit). Overextending on the launch valuation may lead to a longer hold on the PE portfolio, which is likely to counter the underlying portfolio strategy.
Most of the stakeholders in the business should want to see a strong secondary market in the shares value maintained. This underpins management’s interest and shareholder support for the company, it provides a clear market for further exits from shareholders and generates a good news story around the business.
Exiting shareholders are frequently remaining as shareholders and therefore should have an element of commonality with new shareholders. This raises the question as to if an IPO can be right for both exiting shareholders and for new shareholders (both those that come in on day one and those who come in later), how can an advisory fee linked solely to price incentivise appropriately?
IPO
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