This is shaping up to be the City’s most lucrative year for new share flotations for the best part of a decade. Companies ranging from the online electricals retailer AO, to Pets At Home, Poundland, and the games designer King are all likely to list their shares in London over the next few months.
Traditionally, the banks managing those initial public offerings (IPOs) would have concentrated their energy on the big institutional shareholders, both in this country and increasingly in wealthy financial centres such as Dubai. But this time around that would be a mistake.
The Royal Mail float demonstrated that there is a huge demand for decent quality IPOs among private investors. The City should try to get them on board.
True, it might cost a bit more in the short term. But in the medium term it will be worth it – because they will be better long-term owners of companies than the hedge funds and high-frequency traders who increasingly dominate the markets.
After a run of years when an IPO in London was about as common as a dry patch of land in Somerset, 2014 looks likely to see a whole series of major flotations.
There are companies that were taken over by the private-equity firms at the height of the last bull market, who are now looking to realise some of that value – such as Pets at Home, owned by KKR, or DFS, owned by Advent International.
There are firms that fell into the hands of the banks during the crisis. And there are new, rising businesses that have emerged in the last few years, such as the ubiquitous Poundland, or the property advertising website Zoopla.
A generation ago, private investors were actively cultivated for any float. Indeed, many companies offered special perks to their small shareholders to encourage them to get on board.
Many investors bought shares in Eurotunnel to get the travel discounts that came with it, although the actual investment turned out to be fairly catastrophic. A few still offer perks, although they’re so minor they are largely pointless.
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Shareholders in Bloomsbury Publishing, for example, get a 35% discount on its books, which is probably less than they could get on Amazon. It’s unlikely that many people are queuing up for bonuses like that.
The perks, like small shareholders, have faded away. In the last two decades a consensus emerged that private shareholders were not worth the hassle. It was too expensive to run the PR and advertising campaigns needed to reach them, and it was a bother to send out all those share certificates for a few hundred quid each.
Even worse, they might start turning up at the AGM and asking all kinds of annoying questions. It was far more efficient to make a few presentations in London, Zurich and Singapore, and place all the shares with a handful of giant institutions.
Times have changed, however. There are not many buy-and-hold institutions out there. The shares are more likely to end up in the hands of a hedge fund, with a time horizon of a few weeks, or with the high-frequency traders, who buy and sell equities several times in the space of a second.
The share price is subject to flash-crashes and short-selling, all of which can be very destabilising for the management. But, with interest rates at 300-year lows and likely to stay there for a lot longer, plenty of people are looking for somewhere to put their money to work.
There is an opportunity to revive popular share ownership – but only if the City, and the companies listing their shares, grasp it. There are three ways they could start doing that.
First, IPOs should be thrown open to as many people as possible. Some floats are restricted to institutional investors only, in the belief that this is the smartest way to maximise the price. It might be – but it is not necessarily the best way to create the most stable base of shareholders.
Secondly, pay for an advertising and marketing campaign. It doesn’t have to involve high-budget advertisements in the middle of The X-Factor. But it does need to be well targeted and build up some momentum. You can’t expect investors to buy shares in an IPO they haven’t heard about.
Finally, and more controversially, price the issue at an attractive discount. Work out the right price for the shares, and then knock 10% to 20% off, so that they are being sold for slightly less than their real value.
Inevitably, it will be heavily over-subscribed, and the bank in charge of the float can then weight the allocation of shares to private individuals rather than institutions.
True, all this will cost money in the short term. But if it creates a group of shareholders who are going to hang on to their investment for many years, and are willing to ignore some ups and downs in the market, it might well be worth it.
There are some high-quality firms coming to the market this year, and their shares are natural for retail investors – because people have heard of them. If the City, and the companies, can use that to create a new generation of active shareholders, they might well find it more valuable than just squeezing the highest price possible out of a few hedge funds.