IPO Market, an Investor’s Dream

Friday 1st September 2017

Sophie Laurent speaks with Robert Buttleworth from Gartner Wealth about the IPO market.

SL. Gartner Wealth have been involved in a number of IPO’s this year.

RB. Yes, the global equity markets are in a bull market at present. Across the pond in the US, markets are trading at record highs, with the NASDAQ seeing very strong returns since the previous crash. This makes it the perfect time for owners of companies to bring their company to market to cash in on the positive market sentiment. What people outside of the industry also forget, is it that private equity has invested into a number of explosive stocks, and have now put pressure on the company owners to bring the company to market. Effectively private equity is keen to cash in and lock in profits. As a result we have seen a number of IPO’s this year, though I would have expected many more

SL. Traditionally IPO’s have performed very well.

RB. With out a doubt. Many see new issues as the best investment class of all time. Perhaps with the exception of bitcoin, but IPO’s have been around since the beginning of the markets, so has a far superior trading history. Unfortunately, this market is still very exclusive with the majority of shares going to institutional investors. Though regulators have ensured that the retail markets gets a certain percentage.

SL. What’s your opinion of the key drivers behind this market?

RB. One word Money. The investment banks that win the contract to take the company to market, command very good remuneration. As a result, investment banks are keen to win the business. If they price the IPO wrongly they are unlikely the next large IPO. Consequently, these banks devise a number of strategies to make the IPO successful. IPO’s generally come to the market slightly undervalued to incentive investors to buy in on the day. In addition, upon listing there is usually restrictions imposed on the majority of shares. This usually applies to the directors and the institutions who buy in early, though not to the private investor who can sell out on the day of listing. This means that the supply against demand equilibrium is manipulated which drives the price up. Closer to the time that the restriction is lifted, the stock is pumped buy the investment banks to their clients so they can exit with huge profits.

SL. Some big IPO’s this year are under performing?

RB. Yes Snapchat (SNAP) is below its listing price, as is Blue Apron (APRN). With Snapchat it listed at $24 dollars, and is trading around $17, which is the price our clients paid just before flotation. With IPO’s we always advise clients to sell out a large position on the day to lock in profits. As a result we have seen a good return for investors. With this stock, are analysts are confident that long term this stock will rise significantly. There is a lot of similarity to Facebook which went significantly below its listing price in the ensuing months after flotation as the market struggled to come to terms with how it would deliver significant profits. Yet, five years after flotation Facebook is trading over four times higher than its flotation price. With Blue Apron, the company suffered a terrible time with news breaking that Amazon acquired whole foods. Fortunately we was unable to gain an allocation for Blue Apron, prior to flotation, so we have avoided a few uncomfortable conversations.

SL.You have had a number of winners this year.

RB. Absolutely, the five IPO’s we have been involved in are Appion (85%), Carvana (20%), Claudera (28%), Redfin (57%) (Snapchat (-3%). This leaves us up by an average of over 37% since flotation. With buying in at the discounted IPO price we are up over 50%, which epitomises my earlier point.