The IPO Survival Guide - Lessons learned from the performance of 258 UK IPOs
One of the most important measures of a healthy stock market is the number of companies that choose to float and raise new money from investors. Company IPOs - or initial public offerings - are vital to maintaining the depth, diversity and efficiency of the market. But are they really worth investing in?
This summer, Stockopedia sets out to answer that with our new IPO Survival Guide. We wanted to discover how IPOs have performed in recent years and what investors should consider when it comes to buying into them. Using data covering 258 IPOs across the UK stock market between 2016 and 2021, we can now reveal:
- How do IPOs perform over both the short term and long term?
- Is there a difference in performance between high profile large-cap IPOs and less promoted small-cap IPOs?
- Do IPOs in certain economic sectors perform better than others?
- Does exposure to factors like Quality and Value improve the chances of success with IPOs?
- The importance of the issue price and whether the first day ‘pop’ really exists
- What investors should avoid when it comes to buying into IPOs
A hot market for new listings
IPOs have enjoyed a resurgence in the UK market in 2021. In the first six months, there were 49 new company placings, which was just short of the 50 that occurred in the entirety of 2020.
For existing shareholders - including founders, early stage investors and private equity - IPOs can be a lucrative time to exit. For the investment banks and advisers involved, new floats can be hugely profitable. Even the institutional investors who buy into them at the issue price benefit from early entry into new stocks at what can be attractive prices.
But for individual investors, the advantages are much less clear. Are IPOs an opportunity to buy into cutting edge multi-bagger opportunities, or are they a mechanism for savvy insiders to offload ex-growth companies at nose-bleed valuations? A glance back at recent history finds examples of both.
In Stockopedia’s new research, we started by exploring the performance statistics of IPOs. Across the whole market, on average, the performance of IPOs over the initial six-month period is positive, before subsequently tailing off after one year.
After one year, the average performance starts to pick up again, rising to a 61.44% average return over five years. This is the equivalent of a +10% compound annual growth rate, which most investors would be delighted with - except that’s not the whole story...
This generally positive average performance is heavily skewed by a relatively small number of extreme outliers. You can see from the chart below that, over one year, the top decile of performers significantly distorts the average performance of IPOs.
When adjusting for these exceptions by using the median performance figures, we get a much more sobering view of how IPOs perform over time.
We still see positive performances from IPOs for up to six months, but all performance figures are markedly lower. There is also still a dip at the one-year point, but the scale of the drop is striking. After one year, the median performance figure for IPOs turns negative and continues on a downward trend, reaching a low after the third year post-IPO. We calculated a negative compound annual growth rate of -4.3% median over five years.
Do these alarming initial findings about performance mean that you should avoid IPOs altogether? Not quite. While it’s true that information asymmetry means that private investors are at an informational disadvantage, there are traits to look for that are associated with much better odds of success.
In the weeks to come, we’ll be exploring more of the findings from The IPO Survival Guide - with blogs on how the issue price, company size, sector, and exposure to factors like Quality and Value can all have an influence on the chances of profiting from new IPOs.
The insights in this article are taken from our IPO Survival Guide. In it, the team at Stockopedia provides unique insights into the world of IPOs, derived from data on over 250 UK IPOs between 2016 and 2021. These insights will allow you to make better and more informed investment decisions when presented with the next 'hot' IPO. You can download the full guide for free here.
About Ben Hobson
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Hi SpinBin,
The 5-year median performance figures were based on the stocks for which we had 5 years worth of data. Not all stocks in the study were held for 5 years.
Kind regards,
Keelan
Hi epo001,
Thank you for your comment.
Would be very interesting to carry out this type of analysis in the future. I imagine you would be quite right in assuming that the majority of losers would be the VC led IPOs!
That's why it's so important to go through the prospectus and carry out the necessary research to help determine what you're actually being sold.
Kind regards,
Keelan
I also read somewhere (Clapham's Smart Money Method I believe) that another problem with IPOs was that if they were spun off from a much larger company you might end up with large company funds holding what they regarded as a micro or penny stock and so sell it off as soon as they could.
For PIs there is rarely any point in buying at IPO (and NEVER a VC-led IPO), there is almost always an early dip and waiting for a trading record to establish itself can avoid grief.
EDIT I have my slogan: If the VCs don't want it, neither do I.
Hi Mark,
The performance figures throughout the study are absolute figures. The FTSE All-Share has done fairly well over the period 2016-2021 (with the exception of March 2020). So if you took the relative performance of the market into account, the figures would indeed look worse, especially on a median basis.
Kind regards,
Keelan
The price lowering after a year or so is typical; a company with a very good idea and after a year other companies enter the same product type market and the initiator does not have a second string to its bow. Even the most robust companies have an average life of about 40 years UNLESS they can create new products. The classic case is 3M which gives its staff time and facilities in their offices simply to play; in consequence it sells new products for a year before competitors enter the market by which time it has new products to market. Yes, you can make money on the rockets but need to get out in due course.
Thank you for this excellent article and report.
For anyone interested in this you might also want to read DSCollard's similar report from a couple of years ago - it's really good :-
IPO Analysis Part 2: “D” Listers, Frauds, Buy-Outs and Nomads | By dscollard | Stockopedia
"The majority of IPOs immediately trade higher than their issue price....... this is, unfortunately, only really a benefit to financial institutions. Private investors are often unable to take advantage of underpriced IPOs."
This is obviously unethical but my (rhetorical) question is how is it legal? Isn't it supposed to be a free market?! Where is Sharesoc?
Almost any NI will attract some degree of PI interest - those PIs buying in the market after IPO are completely at the mercy of the market makers and institutions - they can literally set any price they want - hence your 6 month honeymoon. And the market makers at least are taking money again as the price deflates after 6 months.
Whilst I certainly agree with the conclusion that VC sell outs tend to make bad investments I also think a significant minority of microcaps (maybe 10%?) are little more than frauds.
In my view the actual business model often isn't to develop a novel asthma drug/renovate a disused African mine/make VR content - it's actually to spin out a story for as long as possible to gullible PIs (and instis) while all the time lining the directors pockets through inflated salaries, options bonuses and rights issues.
I think these companies and the market itself have worked out that PIs look for management skin in the game so they always have decent director equity. But I don't think the directors care if they ultimately lose all their equity - by then they will have creamed off more than enough through the aforementioned means.
For this reason I actually think significant (but not majority) management holdings in pre-profit stage companies is a red flag and not a bull point.
PS apologies for the slightly ranty phraseology in my posts to this article - I was in a bit of a rush!
Well said! Back in the noughties, bucket shops like Charles Street ''Securities'' (sic) and City (rhymes with.....?) Equities were notorious for bringing micro-caps to AIM (including, I kid you not, a ''gold mine'' in the Philippines!). They had little realistic chance of reaching profitability and were at the mercy of said bucket shops for regular top-up funding, typically creaming-off 25-30% of any funds raised. Conflicts abounded.
I'd like to think regulation has stamped out the worst of these practices, but do feel that many tiddlers are coming to market way too early. They should stay on CrowdCube etc until they have material revenue generation and a route to profitability.
Nice piece of work, I've thought of doing this in the past and appreciate the work that must have gone into it. How about analysing returns by the NOMAD that bought the IPO to market?
An extremely interesting report, very well done. Now at least I have some statistical back up for looking with suspicion at IPOs. It does seem reasonable that those institutions underwriting the issue and liable to have to purchase large amounts of stock in the event of a 'flop' should have some profit-making advantages, and those undertaking to buy large amounts of stock willy-nilly, but not anybody else. I'm with those who think this market is rigged against the private investor. Do you mind if I forward your report electronically to UKSA in the hope that they might take it up?
I am waiting for the next stage of your investigation with eager anticipation and meanwhile nursing a small loss in Fonix (FNX) in the hope that it will come right in the longer term.
Darktrace (LON:DARK) - Shares in recently listed cyber-security firm Darktrace dropped 6.8% to 638.29p after a group of major shareholders sold 23.15 million shares at 620p, close to a 10% discount to last night's closing price.
The shares were floated on 30 April at 250p per share, so the placing banks agreed to waive the sellers' lock-up agreements to allow them to exit early.
I clicked on the download link at the head of this and read the report - thanks - very interesting. However I then had an email from Lawrence Judd inviting me to subscribe to Stockopedia with 25% of the first year subscription! Since I have been subscribing for several years perhaps you could arrange the 25% from my next renewal date. Thanks.
The report takes me back a few decades to when an 'Offer for Sale' (as it was called before, like so much else in this life, it was Americanised to IPO) was required to have a public element. There were a large number of 'Stags' (people who intended selling for a quick profit on day one) often resulting in a ballot to reduce the total number of shareholders rather than have all with very small holdings. Then the rules were changed and Joe Public was elbowed out of sight.
A very good update from £wosg this morning shows the exception to the rule, and that not all debt laden PE/VC flips are bad investments.
I still agree with Keelan's research though - the majority are.
All stock market rules and maxims have exceptions or seem to conflict each other - that's one of the things that makes it so fascinating!
Hi @pedrosailor - please do forward to anyone who you think might be interested!
*Past performance is no indicator of future performance. Performance returns are based on hypothetical scenarios and do not represent an actual investment.
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Ben, a technical question. In the last graph showing the median IPO performance, were all the stocks held for 5 years?