We use cookies to give you the best experience on our website. If you continue without changing your settings we’ll assume you are happy with this. You can find out more about how we use cookies and how to change your settings here.
 

Octopus blog

1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25 | 26 | 27 | 28 | 29 | 30 | 31 | 32 | 33 | 34 | 35 | 36 | 37 | 38 | 39 | 40 | 41 | 42 | 43

Important information

The ideas and conclusions within these blogs are the authors' own and do not necessarily reflect the views of Octopus. They are for general interest only and should not be taken as investment advice or as an invitation to purchase or sell any investment. For our full terms and conditions, please click here.

Do failed flotations show that the stock market is shut or displaying great value?

Andrew Buchanan - 03 March 2010

Do you remember that one of the themes of 2010 was going to be the revival of flotations or at least so said the pundits at the end of 2009?

You would be forgiven if you thought that the stock market had given up on its primary function of financing companies, their growth and their ability therefore to employ greater numbers of individuals. The stock market, by which most people understand the Full List of the London stock market, does seem to have turned its back on new companies and new flotations, doesn't it? New Look has failed to float and even on AIM Big Bear has also failed, and of course there have been several others on the Full List too. Does this mean then that the market is going down, that there is no cash for companies?

I think not. There are flotations happening and money is being invested in companies, but you have to look at AIM to see it and once again AIM is showing the way.

I don't know if Full List investors have run out of money after supporting so many bank rights issues last year, but I suspect they haven't. The truth of the matter is that there is always money for a good company with a sound reason for wanting the additional capital. That is why in January this year AIM has invested £209 million into companies, of which around 10% is for new companies and approximately 90% was for existing businesses already listed on the market. The good companies with the worthwhile reasons are securing additional funds and making use of that capital.

It would appear that investors have stepped into bankers' shoes and effectively are lending permanent capital (that's equity), without the usual bankers' security, to companies to allow them to trade and grow. AIM has always been the market on which young companies grow up, but perhaps most heartening in that AIM itself is maturing and following on its earlier investments. Where that leaves banks in the future is an interesting point. Is there a viable role for them in the smaller company sector? I hope so, otherwise the consequences for UK growth and employment are stark indeed. But in the meantime, their usual lending is being substituted by investors.

So why then are flotations failing? Perversely perhaps, I would argue that flotations are failing because the market is working properly. Big Bear was setting out to raise approximately £50 million, of which only 10% was represented by new money for the company. In other words, existing shareholders were trying to sell shares. The same was substantially true of New Look. There's nothing wrong with that at all. It happens all the time during trading hours on the stock market. But in those cases buyers and sellers agree on the price. In a flotation sellers and their advisers have to make an educated guess at what price level might attract buyers and in these cases the sellers have not been not willing to accept the buyers' terms. Simple: and no trade therefore.

For any investor, there is always the opportunity to invest in an existing quoted company compared to a new flotation. The truth remains that many flotations have been too expensive. Failure has very little, indeed probably nothing, to do with the state of the market - a great deal more with the misjudgement of advisers and sellers.

The correct conclusion is that existing quoted companies, especially amongst smaller AIM companies remain good value and clearly cheap. That is why new equity capital has found its way to them. The market is being very efficient. We are finding good opportunities for our AIM VCTs, which is why there is a top-up for the Octopus AIM VCT PLC.

We expect existing companies, as the AIM statistics show, to continue raising additional capital, so clearly London's stock market is not shut. Many AIM companies are being financed to make acquisitions now that vendor price expectations have rattled back to realistic levels - i.e. ones purchasers are prepared to pay without diluting their own earnings per share. However, many vendors seeking to float their companies are simply trying to raise price levels and they have overestimated what new investors are prepared to pay. Simple really. Greed is out of fashion, out of time and out of buyers.

Octopus Investments Ltd is authorised and regulated by the Financial Conduct Authority. Terms and Conditions of use. ©2013 Octopus Investments Ltd. All rights reserved.