The IPO recession, is it temporary?

Private investors may be losing out on exciting investment opportunities.

Article updated: 2 October 2019 8:00am Author: Michael Baxter

Two IPOs have been pulled in just a few days. Another has seen shares slide sharply. There is a market reaction against the hype of a few years ago, but I fear private investors are being locked out of some of the world’s most exciting companies.

I get frustrated. Well, I don’t want to burden you with my private life, but on this occasion my frustration relates to the stock market and tech.

I wonder if the highly regulated stock markets get it.

Over and over again I uncover an exciting new tech with incredible potential, a company that is crying out for my waxing lyrical prose, only to discover it is not listed on the stock market.

You could argue, of course, that the process of listing, sorts the wheat from the chaff, the insanely high valuations from the sensible valuations.

But there is nothing sensible that is happening with tech — it is changing the world, and not only ordinary investors, the likes of thee and me are shut out, pension funds, with an emphasis on caution, are being shut out too.

The end result: I fear that the extraordinary wealth that will be created by tech over the next decade or two will accrue to a small minority.

Of course, it's risky — of course there is too much hype in tech, but some mighty big companies will emerge from the tech revolution.

Let me remind you, if you had invested £1,000 in 1,000 different techs in 1997, and 999 of them went bust, but one of your investments had been in Amazon, right now you would be sitting on a profit — shares are up 1,150 times. If you had invested £1 in Amazon and £1 in Apple, and 998 had gone bust, you would have very nearly have doubled your money.

The IPO of WeWork has been pulled. The wise-in-hindsight brigade have come out with a list of reasons why, but I am not convinced they are right. The fundamental problem with WeWork was the targeted market cap of $47 billion. Okay, the founder Adam Neumann seems to have behaved in ways that make eye brows rise so far, it’s as if they have gone into orbit. But I like the WeWork product, I have been to their co-working centres and they are fantastic places — there is enormous potential, just not at the planned valuation. However, should WeWork go belly up, my underlying narrative is not changed. Extraordinary value is being created by some private companies.

SoftBank was scared of the implications. If WeWork’s IPO flopped, it would have had to revise down the value of this investment on its books. That would have led to further questions about its strategy. SoftBank is a very important player in the tech scene — if it caught a cold, tech investment might go down with pneumonia.

The IPO of Endeavour has been pulled too, not that the entertainment company has got much to do with tech. But Peloton, which did manage to mix tech with exercise bikes, saw shares slump post IPO.

Shares in Uber and Lyft are down.

I don’t think the markets understand the real long-term business model with Uber and Lyft. The real potential with these companies relates to the convergence between autonomous cars and car sharing. There is no guarantee Uber and Lyft will dominate these industries, but if they do, shares will rise much higher.

I am more concerned about the falling number of companies listed on the stock market. Curiously, there are still 100 companies in the FTSE 100, and 500 in the S&P 500, but the number of listed companies in the US is half the number seen in 1996.

The UK stock market hasn’t quite seen a decline on that scale, but you only have to consider the departure of ARM, my favourite UK tech. The purchase of this company by SoftBank may well have been good for the company, but it was a tragic loss for UK investors, deprived from holding shares in such a company.

Things move in cycles — it may simply be that things will change, but I fear that the straitjacket imposed on listed companies means that more and more outstanding businesses are staying clear of stock markets, and I don’t think this is a good thing.


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Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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