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After a dearth of flotations and new issues, suddenly the market has barked back into life. This is generally good news as it is a sign that some investor confidence is returning to the markets. Certainly speaking to investment banking chums, their work has increased enormously over the past few months resulting in a sudden reversal of staff reduction programmes and even some recruitment again. This is all positive stuff and along with the headline deals of Microsoft and Vodafone, and the news on the Royal Mail, we can see that this has certainly woken up the post holidays markets.
However, here is time for a note of caution before we all get too carried away. Companies floating on the market can provide an excellent opportunity to invest in exciting and growing businesses, but all such floats are not the same. The marketing will of course be highlighting the unique opportunities that no doubt their particular offering features – after all that’s what they get their commission for. The truth though is that all too often such offers are priced to raise as much as possible for the sellers and not necessarily provide enough for the buyers. Such mispricing can be accidental sometimes if markets suddenly move against you. However, there are also occasions when something more suspicious is happening; an interesting example of that was the Facebook flotation, although to be fair it has now risen finally significantly above its original offer price.
In my view, we have to look at the underlying reason for the launch in the first place, and for what end. For example; what is the stated intention of the float and fund raising? If this is a growing business then the application of the monies will be clear in terms of development and / or expansion. From that you can then take a view as to whether the business can fulfil its expectations and provide you with the investment return you need.
Equally though you should take care to look out for those who are just looking to cash in their investment and in effect ask you to finance their retirement. This is quite understandable but not necessarily what you may see as a good use for your funds. This can be further complicated by other investors also trying to exit, and especially in terms of the private equity market.
Private equity depends upon a regular flow of investment and sales, frequently on a three to five year cycle. Unfortunately the recent years have seen them suffer from a form of investment constipation where they have been unable to sell on old investments and thus restrict their ability to reinvest. This now seems to be changing as a level of confidence returns to the market.
Of course private equity is a vital part of our economic funding process, but like all elements of the market has its good as well as less attractive elements. The white knight private equity businesses look to finance growing businesses to get them set for their next stage of growth: the black knights look to extract as much as they possibly can from their investment and pass on the residue to you.
So good news we have new businesses coming to the market, but please take care, the glossy prospectus will highlight the opportunities, but not necessarily the risks and pitfalls.