Investors’ Anger Rises at Poor IPO Returns

Investors’ anger over the performance of stock market listings this year is rising after the fall of shares in a number of high-profile offerings below their sale price.

More than half the big initial public offerings in Europe this year are trading below their issue price, according to data from Dealogic, prompting claims from institutional investors that companies are being sold at unrealistic valuations.

Broker works the trading floor at the New York Stock Exchange.
Broker works the trading floor at the New York Stock Exchange.

Institutional investors complain that investment bankers are siding too closely with corporate clients on IPOs, advising companies to price shares at levels that are too high.

While such tensions are a traditional feature of the IPO market and equity markets in general have slumped this year, the poor record of some prominent deals in 2010 has been such that it has triggered a backlash from investors.

“Investors are sick to the back teeth of being treated like idiots,” said Dan Nickols, head of mid- and small-cap equities at Old Mutual Asset Managers. “Companies have been too greedy or misunderstood what the right price for their float is.”

David Lis, head of UK equities at Aviva Investors, added: “Until investment bankers realise that instead of lining their pockets and those of their corporate clients, they need to consider what is a fair valuation for the eventual buyer of their overpriced IPOs, then it is unlikely that the new issue market can function.”

Shares in Ocado, the online retailer, which hired eight investment banks to advise on its flotation, have fallen 20 per cent in just over a month since listing.

Yet that drop has been eclipsed by Promethean World, the maker of interactive white boards that has seen its shares tumble by 36 per cent from their issue price since the company’s March flotation.

Some bankers worry that the European IPO market will continue to stutter, given the extent of investor scepticism and concerns about the economy.

Of the 31 European IPOs this year that have raised more than $100 million, 16 were trading below their issue price by the close of trading last Friday, according to Dealogic data.

The average performance of the five UBS-backed European IPOs this year has been a drop of 1 per cent. That was worst of the seven banks that have worked on three or more flotations in Europe that raised more than $100m in 2010.

The average performance of the six IPOs backed by Goldman Sachs among the 31 deals has been a drop of 0.7 per cent. The three IPOs worked on by Bank of America-Merrill Lynch have performed the best of the seven banks, rising an average of 14.3 per cent.

The average gain of the shares of all the 31 IPOs this year is 3.76 per cent.

In comparison, the pan-European FTSE Eurofirst 300 index is down 1.9 per cent this year, while the FTSE 100 index has dropped 3.9 per cent.

Flotations of investment funds, and listings of so-called global depositary receipts – securities representing shares of a company traded on a different stock exchange – were not included in the Dealogic data.