Neil Bennett | City A.M. Notebook

When I was a young financial reporter, sometime in the last century, I occasionally boosted my modest income by investing in a few IPOs – or new issues as they were called then. Don’t be shocked, it was all above board and in those days private investors were encouraged rather than hunted to extinction by today’s regulatory sledgehammer.

I would put up a couple of hundred or so every few months and most times would be rewarded by a 5% or 10% bump when the shares started trading, not a bad return for having your money tied up for a month or so.

The point of my story is to shed light on the real reason the IPO market is comatose, not just in London but across most of the world. The FCA can have its FEMR, the PMER, and a whole spaghetti soup of chin-stroking reviews, but the essential missing ingredient is FOMO – Fear of Missing Out.

Financial markets are generally simple, (although plenty of people try to make them seem complex). People buy a share for 100p because they believe it will be worth 110p or so in a year’s time. Until a few years ago IPOs were mostly a sure thing for investors. The brokers would price the new equity at a discount and subscribers would get a healthy premium on day one, perhaps four times out of five.

Today by contrast the outlook for IPO investors is pretty dire. The last crop of new issues in London have performed appallingly, with some like made.com going bust. Why would anyone queue up to lose money? It’s a re-run of that old joke – how do you make a small fortune? Invest a large one in IPOs.

Only last week we saw more of the same when Birkenstock’s shares cratered in New York after their IPO. They are now down 18% from their $46 IPO price, meaning the company’s value has fallen $1.3bn in six trading days. That’s a lot of hipster sandals.

The issue is that both the sellers and the brokers that advise them have changed – and the model is broken. In the past many sellers were entrepreneurs who wanted to release some of the capital in their business but continue running them. The brokers were wise birds who persuaded them to sell an initial tranche at a discount to enable them to build the share price over time (and sell more later).

The main sellers today are PE firms. They want to secure the highest possible price NOW – and have a duty to their own investors to do so. So they find brokers who offer them an unfeasibly high valuation and are then hellbent on securing it. The result, quite often now, is a car crash. And the dark truth is that many remaining IPO investors are hedge funds who are only buying the stock to cover the shorts on their trading book later on.

There is a simple solution to all this – realism. IPO sellers need to be more realistic about valuations and brokers need to be more realistic in their advice. Otherwise, they may get Birkenstock away this week but then frighten everyone off for months, ensuring that the IPO market remains essentially closed. Markets are built on relationships, not smash and grab raids, and today’s practitioners need to remember that.

Funny Money

I’ve just returned from a holiday in Uzbekistan, which was awe-inspiring. Apart from the breathtaking architecture and terrifying history however, there was also a sharp lesson in sound economics.

Today there are no fewer than 14,000 Som (the local currency) to the pound, compared with 3,500 ten years ago. No wonder our guide said sadly: “It’s easy to be a millionaire in Uzbekistan” and told us that everyone saves their money in dollars.

Uzbekistan is a nation with a wealth of natural resources and strong commercial culture. But the rules of economics are harsh – if any government prints money it doesn’t have, there are consequences.

Quote

“I don’t think I have to justify my eating habits…”

Szabolcs Fekete, sacked Citi banker, lying about buying a sandwich for his partner on a business trip. He specialised apparently in financial crime.

Recommendation

Killers of the Flower Moon, in cinemas from October 20^th.

After the Covid-induced famine of cinema new releases, we have been enjoying a really good run recently. Next week we have a chance to see Martin Scorsese’s 26^th and latest work, about the appalling mistreatment of The Osage Indians in 1920s America. If it is half as good as the reviews suggest it is brilliant, with a standout performance from Leonardo DiCaprio. I believe strongly that we are in a ‘use them or lose them’ period with cinemas, so will be making the trip to see this.

By Neil Bennett

Co-Chief Executive  H/Advisors