High-profile flops fail to dent IPO market

Forty per cent of new issues are down, but overall they are showing a 27 per cent return since Freeserve
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The Independent Online

Some 44 per cent of new issues that have listed in London since Freeserve kick-started a rush of hi-tech flotations in September have flopped. But, in defiance of popular wisdom, an analysis by The Independent has found that a portfolio of all new issues since then is still up some 27 per cent.

Some 44 per cent of new issues that have listed in London since Freeserve kick-started a rush of hi-tech flotations in September have flopped. But, in defiance of popular wisdom, an analysis by The Independent has found that a portfolio of all new issues since then is still up some 27 per cent.

Three more companies pressed on with flotations yesterday, deterred neither by the brief fall in Carphone Warehouse shares below their issue price nor continuing falls in shares in Freeserve amid broker downgrades. Lastminute.com, the online travel agent, and egg, the Net bank, are still trading below their float price.

While this makes the market for initial public offerings (IPOs) look troubled, analysts and fund managers in the City are sanguine. The prevailing wisdom is that, despite a little local difficulty for some particular stocks, these are good times for entrepreneurs and investors alike.

"There is plenty of liquidity for the right company," says Gareth Lake, head of UK capital markets at Schroder Salomon Smith Barney, citing the £8bn of demand for last week's float of Granada Media, which was spun out of the Granada leisure group.

Mr Lake says lessons have been learnt from the fiasco over lastminute.com, and the lacklustre début for Carphone Warehouse is in fact a good thing. Egg's difficulties have more to do with the malaise that has overcome the banking sector rather than a problem with the new issues market, he says.

"Carphone Warehouse is now back above its issue price so it's not a disaster. Maybe it was actually a well-priced deal. Clearly, institutions are happier if an issue jumps 10 per cent on day one. But the deal is they're buying for the long term. A lack of volatility is a good thing."

John Hatherley, head of global analysis at M&G, agrees. He reckons Carphone Warehouse fell on a technical issue. Institutional investors disappointed by the small size of their allocations following the heavy subscription for the issue chose to sell their holdings because illiquidity made it hard to increase their holdings. Lock-ins to prevent retail investors selling created illiquidity, he says.

"It's an odd market. While you can draw a line between the new issues market in the first and second quarter, it hasn't dried up. Technology stocks where you can see the growth, like Bookham Technology and Parthus, have done well and that has encouraged banks to promote similar companies. If an issue has something the market really wants, it'll be heavily oversubscribed."

In addition to continuing enthusiasm from investors for the very best tech stocks, the new issues market additionally has the support of a buoyant economy both here and in the US.

Mike Young, head of European investment strategy at Goldman Sachs, says: "We're looking at a market that's not much off its all-time high. There's a very strong economy growing at an acceptable rate, so there's every reason to come to the market now. You can't make a judgement on issue prices until after a year. Then you can see if the business is working according to plan."

So, why the apparent problems? The principal difficulty is continuing short-termism on the part of a large coterie of investors. They are forcing out long-term investors from the market. "We are going through a period of great uncertainty about which types of business will make investors wealthy and which will not. People want to exit 20 per cent up straight away, which creates artificial demand in the short-term. Even if stock is priced carefully, there's not much you can do about it," says Mr Young.

Fund managers have a different explanation, pointing the finger at the culture in US investment banks. "There's an unholy alliance between the short-terms - the 'flippers' - and the banks. The flippers allow the banks to say a float is oversubscribed, when in fact it's 50 per cent under subscribed by long-term investors," says a spokesman for one institutional fund. "I do have concerns about their attitude. The feedback is that they don't care about what happens to a stock after its floated."

At the same time, bankers are rushing to float companies before the City enters its traditional slowdown in August, knowing that hundreds of companies are hoping to raise money come the autumn.

That has coincided with a new-found caution on the part of institutional investors. In the first quarter of this year, high-risk fledgling companies that would previously have been restricted to venture capital finance were found themselves capable of raising millions on the stock market for nothing more than an idea. That has changed.

"[In the first quarter] the institutional community was short of growth opportunities in Europe, which, in a low inflation environment, everyone is desperate for. There was no alternative to early-stage technology companies. We won't see those conditions ever again," says Gareth Lake at Schroders. "Only established businesses will get away now, just like it used to be."

Investors watching their new additions to their portfolios sink should take heart from the experience of the 1970s, says Mr Young. "The unleashing of entrepreneurial energy will lead to some failures and successes. You should expect a degree of uncertainty. If you bought eight business software stocks in the 70s, five are probably bust now. But one would be Microsoft."

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