In a record year for IPOs, who did well, and who didn’t

Having undergone a bit of a lean year in 2020 for IPOs, hopes were high that 2021 would be a better one for the London IPO market.

This year we’ve seen more new issues come out of the blocks with varying degrees of success. For some reason, unlike in the US where every company with a pulse seems to attract an extraordinary valuation, investors this side of the pond seem to have a more discerning eye.

This can have its advantages, but also has its disadvantages as it makes it much more difficult to get the right valuation, as companies try and get their communication strategy right, a lesson that Deliveroo found out to its cost, when it launched back in March.

It’s a lesson the company appears to have learnt, unlike THG, which after flying higher in the wake of its 2020 IPO has come crashing back down to earth with a sickening thud, amidst speculation that it could be taken back into private hands.

As we look back on 2021 for the London market, it’s not been a bad year, with some notable successes like Darktrace, however we’ve seen it once again overshadowed by the US particularly when it comes to the popularity of SPACs, which are Special Purpose Acquisition Company’s.

These are essentially publicly listed blank cheque companies, which are funded by a quorum of private investors, who look around for a fledgling business, and then acquire it on the part of these investors. SPAC’s sole purpose is to then take this promising business and run it as a going concern and allows this business to tap public markets without going through the expense of an IPO.

These have proved to be quite popular this year with some notable examples including Cazoo and Nextdoor who were both taken public by SPACs. Cazoo was taken public by AJAX I, with the company raising $1.6bn, and valuing the business at $7bn, while Nextdoor the neighbourhood social media app was taken public by Khosla Ventures at a valuation of $4.3bn, raising around $686m in the process. The jury however remains out on how investable some of these companies are given that the levels of transparency required when it comes to due diligence probably aren’t anywhere near as rigorous as they would be for an IPO listing. 

Back in the UK we’ve seen the likes of Moonpig Group, Dr. Martens, Deliveroo, Darktrace, Alphawave, Wise, Bridgepoint Group and Oxford Nanopore Technologies come out of the traps with varying degrees of success.

On the plus side we’ve seen some successes with Darktrace, Dr. Martens, Bridgepoint Group and Oxford Nanopore standing out, and still trading above their IPO price, with the challenge for investors being one of trying to seek out the motives behind a sale or listing.

Sometimes early investors in these companies coming to market can use these opportunities to ramp up the valuation of the business in order to take profit on their own early investment, and it’s up to investors to make up their own minds.

AI cyber security company, Darktrace got off to a flier, although some of that was down to it its final IPO listing price being marked lower in the wake of Deliveroo’s float a few weeks before which flopped badly. Deliveroo’s shares plunged precipitously from their 390p listing price to as low as 225p, before returning to the listing price in August before settling at their current levels.

While Darktrace’s listing price as marked lower due to concerns over too high a valuation, there was also some nervousness around its associations with former Autonomy CEO Mike Lynch, who is a founder member of Darktrace through his Invoke Capital fund. Lynch was on trial for fraud as part of his involvement in the Hewlett-Packard Autonomy deal and was fighting extradition charges to the US over that deal.

As part of its filing Darktrace warned that there was a small chance that it could also be charged with offences as part of any fallout, though management felt this was a remote prospect. Nonetheless it wasn’t an ideal backdrop for drumming up interest in what has turned out to be an exciting investment proposition. Despite this the shares have done well and have ended up in the FTSE100, not a bad start for a company that has been public for a matter of months.

Deliveroo’s downfall was its valuation was way too high for a company that firstly had a dual class structure, along with concerns about working practices and a lack of profits. Fortunately, it has been able to turn around some of these concerns, signing deals with Amazon Prime, Amazon has a 16% stake in the business, as well as deals with Morrisons, Leon, Chipotle, Starbucks, and Costa but it’s still likely to be a long road back.

Wise Group, formerly TransferWise also initially traded at a premium to its 800p direct listing price, peaking in September at 1,175p, however it has slipped back since then drifting below 800p earlier this month.

Sometimes direct listings are looked at more favourably from an investor point of view than IPOs for the simple reason that the company isn’t looking to raise new capital, but simply widen its shareholder base, and make the shares more tradeable.

A direct listing is also cheaper than an IPO and tends to be pursued by companies that already have strong brand recognition, and also doesn’t have lock-up periods which means investors don’t have the worry of existing investors looking to cash out in the wake of an IPO boost. Spotify and Coinbase are two companies that have gone down this route.

Another exciting opportunity was Oxford Nanopore, which raised £350m at an offer price of 425p, while some of its existing shareholders also sold some of their own holdings. The company supplies rapid Covid-19 test to the NHS, as well as providing the technology to help spot and track coronavirus mutations.

The company has also partnered with Oracle to explore new solutions that would use genomic sequencing which would run on its cloud infrastructure on a global scale.

We also saw the likes of e-card and gift business Moonpig, get off to successful start pricing at 350p, raising £491m, with investor interest helping to drive the shares up 29% on its debut.

Bootmaker Dr. Martens also got off to a flier, pricing at 370p, trading well above 400p on its debut, and trading as high as 510p in early June, as private equity owner Permira, which bought the brand in 2013 sold some of its own stake, with no proceeds going back to the business.    

While we saw Deliveroo disappoint, another let down has been Toronto based tech chip IP company, Alphawave which was priced at 410p, and slid sharply on its first day of trading and has continued to do so. The company raised £856m, selling 360m new shares and listing around 28% of the business, which it said it might use to open a new headquarters and R&D centre in Cambridge as part of its overseas expansion. The business, which licenses its technology to other chip manufacturers saw its share price slide even further in September on concerns over transparency over some of its business relationships.

Private equity company Bridgepoint Group also enjoyed a decent start to life on the UK stock market, listing at 350p a share, the company has investments in Hobbycraft, Fat Face and recently bought a stake in Itsu, the fast-food chain in June. The company currently has €29bn of funds under management and a presence across the US, Europe and China, and recently reported H1 revenues of £122.2m, a 55% increase year on year.

Over in the US it’s been the same old story of valuations that in some cases have borne no relation to the underlying fundamentals.

Not only has it been a record year for IPOs but globally we’ve seen over 2,800 businesses raise more than $600bn blowing the previous record in 2007 into the weeds.

The most notable and high profile has been electric vehicle start-up Rivian Automotive which has the backing of Amazon and Ford.

Despite having no discernible revenue to speak of this business surged from its initial $78 IPO price to as high as $179 in the first week of trading, pushing it above the market caps of the likes of Ford and Volkswagen in the process. It has slipped back a little since then, but it still has a market cap of over $100bn, which for a company that has yet to earn much in the way of revenue, and is a long way from turning a profit, is a huge bet on its future prospects.

Other notable IPOs have seen companies take advantage of the online trading boom in crypto currencies as well as meme stocks, with online crypto exchange Coinbase surging out of the traps with its direct listing in April, and which saw huge amounts of volatility on its opening day.

Opening well above its $250 reference price, at $381 the shares peaked at $428, before closing at $328, and sliding down to as low as $209 in May before rebounding on the back of a recovery in Q2 turnover. Revenues in Q2 rose to over $2bn, and while we’ve seen Q3 revenues slow to $1.31bn, the shares have continued to advance, despite concerns over tighter regulation. Monthly users also fell back in Q3 to 7.4m, down from the 8.8m in Q2, while trading volumes declined to $327bn, from $462bn.  

Robinhood Markets has also been a big winner from the online trading boom and was a key component behind the wild moves in GameStop and AMC Entertainment in January this year, which burnt a whole host of short sellers. There was a huge amount of hype around its IPO, with the hope that it had resolved a lot of its early liquidity problems, which brought it to the attention of US lawmakers. Pricing at $38 on its debut the shares initially slipped back, and while they have been as high as $84 the move higher proved to be quite short lived, with the shares slipping below $30 as the feeding frenzy from earlier this year subsided to much lower levels of trading activity. Total revenue for Q3 came in at $364.9m, well short of the $423.9m estimates. Crypto revenue fell back to $51m from $233m set in Q2, which is quite a drop-off. The drop off in crypto revenue is a particular worry given the recent rise to record highs, after all if people don’t trade when news flow around bitcoin hitting record highs is front of mind, you have to question when they will. Losses came in at $1.32bn with the company warning that Q4 revenue could be even lower at $325m.

Other lower profile IPOs have been the likes of vegan dairy start-up Oatly, and Jessica Alba’s Honest Group, and while they have lacked the sort of hype of its other higher profile peers, there was still huge expectations around their ambitions, which probably saw them come to market with a lot of froth built into their valuations. This froth appears to have been borne out by the sharp declines we’ve seen in the share prices since their opening day launches.

Oatly has had a shocker in the past few months, coming to market with valuation of $10bn and a $17 price this vegan dairy start-up was being hyped up to be as popular as Beyond Meat, which saw its share price surge out of the blocks when it went public over two years ago.

Given those sorts of expectations, and the popularity of the brand in the US across a wide demographic, hopes were high of a successful debut given its high-profile celebrity backers, including Jay-Z, and the fact that the global market for milk alternatives has a value of $18bn.

Unfortunately, it also has stiff competition in this area in the form of Alpro, which is owned by Danone, however with brands like Starbucks carrying its products the outlook appears positive, although whether it justified a $10bn valuation was another question entirely. For now, the answer appears to be no, given that the company has yet to make a profit, losing $60m last year alone.

Jessica Alba’s Honest company also saw its shares jump out of the blocks listing on the Nasdaq at a premium to its IPO price of $16, raising $412.8m in the process as it closed up near $23, giving it a market cap of $2bn at the time.

The post IPO bounce did not last with the shares now down below $10, with the company facing a class action on the basis that management allegedly lied about its prospects going into the Covid-19 pandemic when it filed its IPO.

The company which promotes and sells sanitary, cleaning and beauty products that are safe and eco-friendly, saw net losses in Q2 increase to $20m, with revenues falling short at $74.6m. In Q3 revenues improved to $82.7m, however concerns about higher margins appear to be weighing on the share price.

To summarise, while it’s been a record year for new companies coming to market, it’s been very much hit and miss when it comes to how well individual companies have performed.

You would think that the companies with decent underlying fundamentals would have probably done better than the ones with less robust fundamentals. Judging by the performance of companies like Rivian, nothing could be further from the truth, and while some companies have seen successful IPOs this year, this appears to be more to do with whether or not they are trendy, and less to do with the resilience of their finances. 

As such it makes picking a winner more akin to throwing a dart at a dartboard while blindfolded. You might hit the bullseye, however you’re probably more likely to miss completely.