The Pride - Issue 3 - Summer 2019 - Magazine - Page 21
ARTI C LE
Victoria Stevens explains how to spot Economic Advantage in newly listed companies
and the compelling reasons to selectively invest in this exciting part of the market.
least one of the three intangible assets
we seek: recurring income, intellectual
property and strong distribution networks.
Our ability to make this assessment is
largely unaffected by whether we are
dealing with an IPO or an established
stockmarket listing.
VICTORIA STEVENS
In spite of a slow start
2018 has been a busy year for initial
public offerings (IPOs) on the London
stock market, with over 90 companies
“listing” up to the end of July.
As a team, we tend to apply our
Economic Advantage process to
companies already listed on the London
Stock Exchange (LSE), but we have
found IPOs can provide a good pipeline
of potential investments for our funds,
particularly at the small-cap and microcap end of the market.
In principle, we apply the same
investment criteria to the assessment of
IPOs as to companies already listed.
In practicality, the typical profile of a
company joining the market and the
mechanics of the listing process adds a
layer of complexity.
For us to invest in a business, the first
stage is to confirm that it possesses
‘Economic Advantage’ in the form of at
It is at the second stage of our process
– seeking evidence of superior financial
returns – that we encounter some
differences. For listed companies, there
is a wealth of documentation which
can be delved into, while a company
approaching an IPO will typically
have less historic financial information
available, especially if the business is
itself relatively young. Balance sheets and
profit & loss accounts may additionally
need adjusting if the IPO proceeds will
fund changes to the business or balance
sheet – by paying down a chunk of debt
for instance.
Despite these uncertainties, there
are compelling reasons to selectively
participate in IPOs. The most obvious
attraction is valuation – this is the
third step in our investment process. In
general, shares in a company coming
to market will be available at a discount
to its listed peers to compensate for the
uncertainties. As the company proves
itself over time, this discount will be
expected to narrow.
Another factor often leading to attractive
IPO pricing is the desire to “get it
away”. If shares in an IPO are priced
too expensively then they will be undersubscribed, damaging the credibility of
the broker and leading to the IPO being
cancelled, or postponed and reset at a
lower level. This creates a bias to price
IPOs keenly to attract interest, create
over-subscription and raise the likelihood
of a share price rise.
A further appeal of IPOs is that they
often enable investors to tap into new,
emerging industries and ‘get in on the
ground floor’. While this opens up
the possibility of significant upside,
it also requires a discerning eye to
avoid investing in fads. Our investment
process has built-in criteria that are
designed to reduce the chance of
exposure to these risky stocks – we
only invest in profitable companies, for
example, and avoid those with weak
balance sheets or an over-aggressive
approach to acquisitions.
Historically, some of our funds’ most
consistent performers have been sourced
via IPOs, for example Craneware, which
entered our portfolios on its stockmarket
flotation in 2007. The largest provider of
pricing and billing systems to American
hospitals, Craneware is a relatively rare
instance of a stock that possesses all three
of the Economic Advantage intangible
assets. Since 2007 – on a total return
basis with dividends reinvested - it has
made investors more than 2,800 per
cent over the course of a decade.
Issue 2 Winter 2018 - TH E P R I DE - 21