The quieter summer months are an opportune time to reflect on what has been a manic year for the initial public offering (IPO) industry. With investment bankers on holiday and trading volumes lower, it has now been over a week (!) since a new piece of IPO research landed on my desk. Here are a few thoughts and observations – some serious, others less so – on what we have seen thus far.
Firstly, the sheer volume of output is pretty immense. My colleague Matt Hall has kept copies of all the IPO research reports he has received so far this year. You can see it all laid out on my desk in the above photo. There are 80 documents in total, relating to around 30 individual IPOs (most have at least 3 investment banks promoting them). This is far from exhaustive though as there are many other reports that I or my colleagues will have received (and didn’t keep), that Matt didn’t receive.
I believe that very little of this output is actually read for the simple reason that most buy-side investors don’t have the time. Most of these reports are 50+ pages in length which means 1-2 hours to read and digest properly. If I were to examine them all of them it would eat away a lot of the time I have to research other investment ideas which, as I have argued elsewhere, are likely to be more fruitful than any IPO.
I am told it is a legal requirement for these research documents to be sent out in paper format. So how much paper has the IPO industry used (wasted?) so far this year? My sell side contacts have suggested 500-1000 recipients for each piece of research. So an average of 750 x 80 documents x 50 pages = 3,000,000 pieces of paper (According to calculations here, a typical pine tree yields around 80,000 sheets of paper, so we’ve got through over 37 trees so far this year). Of course this is just for the UK IPOs. There have been many, many more IPOs in Europe and the US.
A more serious question relates to quality. With such a short time frame to make decisions, typically very little in the way of historical information, and a vast number of IPOs taking place at the same time, there must be a risk that the investment community is not able to do sufficient due diligence and such the shares may be mispriced at float. Unfortunately, given the asymmetric biases inherent in the IPO process, this mispricing is more likely to take the form of overvaluation rather than undervaluation. As an active investor, this doesn’t really matter to me since I don’t have to invest in any IPOs. However, it is a problem for passive investment strategies because index funds will have to buy all the IPOs once they enter the index which will typically happen at the first quarterly rebalancing after they float.
How have UK IPOs performed so far this year? In general the first wave at the beginning of the year mostly did pretty well but many have since fallen back. More recently a number of the IPOs have been falling on the first day of trading. Below is a table showing all the UK IPOs that have come across our desks in some form this year. The average performance of -1%, while clearly far from spectacular, is in line with the wider UK market and actually not that bad when compared to the long-term track-record of IPOs which have been shown on average to significantly underperform the wider market. It will be interesting to review the situation again early in 2015…