Is the Era of the IPO Over?
Staff Writer, CNBC.com
Initial public offerings (IPOs) have underperformed the market since the credit crisis began, so are they still the best way for businesses to raise money?
"IPOs can still be a good thing," Henry Dixon, fund manager at Matterley Asset Management, told CNBC Friday. "In the last cycle, they worked very well and outperformed the market." In 2007, he added, it all went wrong.
"Over the last two years, it has been very depressed from a share price perspective, and underperformed the wider U.K. market by about 50 per cent," Dixon said.
Attention has focused on the valuations of both social-networking site LinkedIn,
and commodities trader Glencore in recent weeks.
Both companies have listed in the past few weeks, with Glencore raising $10 billion in London’s biggest ever international IPO. Both have seen their share prices fall significantly since coming to market.
"It’s an extraordinarily difficult part of the market at the moment,” Dixon said. “That is not to say an IPO can’t work well in this market. Look at AZ Electronics and Shaftsinkers, which had the common denominator of being listed at a discount to their comps. That is at odds with let say Glencore.
"I think the IPO is a good use of capital if it's placed at the right price," Dixon said.
There have been concerns about the increasing fees paid to the banks underwriting IPOs, as well. Average fees in London rose to more than 3 percent in 2009 from around two to 2.5 percent in 2007, according to U.K. watchdog the Office of Fair Trading.
Corporate Governance Concerns
There have been concerns about the corporate governance of ENRC, the Kazakh miner listed in London, this week.
Sir Richard Sykes and Ken Olisa, two of the four independent directors hired when the company listed to lend it respectability, have been ousted from the board, with a third, Mehmet Dalman, vice chairman of Toscafund, reported by the Financial Times to be considering their position.
Olisa's resignation letter revealed that an evaluation of ENRC's board by the Institute of Chartered Secretaries and Administrators had shown a "chronic failure to meet the governance expected of a FTSE 100 company."
"It has become more and more apparent that the founders' influence was less transparent than is ideal," Mr Olisa wrote, adding that the ousting was “more Soviet than City.”
London's reputation for corporate governance is still strong, Dixon said.
"ENRC was probably the exception to the rule. I think our governance is very good, every bit as good as the U.S., although they’d try to tell you it isn’t," he added. "London remains the financial center, but we have got to be bloody careful that we don’t lose that to Singapore or Hong Kong. We have got to play a careful game."
“We clearly have a lot of bad news in the market at the moment,” he said, when asked about where to invest at the moment.
“At times like this we look at the laggards in the sector and see if they’re undervalued," Dixon said. "I think it’s always interesting to see what companies are doing and that they are buying other companies is quite telling. It shows that things are a bit cheaper out there."