London IPO market enjoys best year since financial crisis

Fri Nov 15, 2013 9:44am EST

* Growth in London IPOs outpaces most other major centres

* Private equity firms make a move after years of waiting

* Flows into equity funds, U.S. investors boost demand

* 2014 could see more strong IPO activity in London

By Kylie MacLellan

LONDON, Nov 15 (Reuters) - London is having its busiest year for stock market listings since the financial crisis struck and companies and their bankers are pushing to complete more offerings before 2013 draws to an end.

With listings typically taking about a month to complete from launch, bankers say companies need to kick off initial public offerings (IPOs) in the next few days if they are to be completed before investors head off for the Christmas break.

Although many of Europe's economies are still struggling to return to durable growth, equity markets have soared, boosting the valuations and appeal of businesses in several sectors.

London's FTSE 100 share index is up around 14 percent this year and the pan-European FTSEurofirst 300 index has risen around 15 percent.

A European IPO revival is under way after years of drought due to the financial crisis and London is seeing the most activity, with more firms going public there so far in 2013 than in the same period of any year since 2007, according to Thomson Reuters data.

While equity fund managers are sitting on more money to invest, company managers are growing more optimistic about the business outlook - recent upbeat UK economic data point to a sustainable recovery from the deepest recession since World War Two.

IPOs allow funds to put big chunks of money to work in one go at what is usually considered a discounted price.

And there has been a steady flow of listings to choose from, as a calmer market tempts companies and their owners to test the water again, many of them private equity firms needing to exit their investments after many years.

Some companies have been courting potential investors for months or years, helping smooth the process as investors have had more time to understand the business.

"You have a sweet spot right now where investors increasingly have more money that they need to put to work and IPOs are a great opportunity for them," said one banker involved in equity issues, who declined to be named.

Although the number of London listings as of Nov. 11 is the highest in six years, the amount raised - $14.5 billion - was surpassed in 2011. However, half of that year's total came from one flotation - commodities trader Glencore, now Glencore Xstrata.

LONDON FUNDRAISING QUADRUPLES

The global volume of new listings has increased, but London has seen a bigger rise than most other major centres, with a more than quadrupling of the sums raised compared to the same time last year.

The amount raised in Hong Kong is up around 280 percent on last year, while volumes in the United States have risen 31 percent.

Although the UK market is still far from reaching the peaks of 2006-07, when more than $50 billion was raised annually in London, those lining up companies to bring to market next year expect the flurry to continue.

"The UK is historically a very active market. If anything, it has been a sleeping giant over the last few years," said Greg Chamberlain, head of UK Equity Capital Markets at JP Morgan.

"Success breeds success. The better this year's IPOs trade, the more people will trust investing in new deals. Next year could be very active."

Research by Deloitte last week showed that, on average, IPOs on London's main market this year had delivered returns seven times greater than the FTSE 100.

Still, a longer-term look at the track record of companies that go public suggests investors should be wary of any euphoria around upcoming IPOs.

Data from private bank Kleinwort Benson shows that over the past decade investor support was rarely rewarded within a year of listing.

MORE SENSIBLE PRICING?

One of the biggest drivers of activity in 2013 has been the return of listings by private-equity backed companies, which have been largely absent for the past few years after a string of poorly performing deals made investors wary of taking part.

A more sensible approach to pricing has helped rebuild trust, as well as private equity owners generally offloading smaller stakes at the time of listing, advisors say.

Private equity-backed companies, including attractions operator Merlin Entertainments and estate agency Foxtons, account for more than a third of IPO money raised in London this year, the highest proportion since 2004.

Flows into equity funds and U.S. investors turning their attention back to Europe have helped boost demand, bankers said.

Those working on flotations said a return to volatility prompted by a big macroeconomic shock was the biggest risk to the continued success of the market. For now, companies continue to press ahead, with retailers Poundland and Pets at Home reported to be among those preparing an IPO next year.

Terra Firma's Infinis Energy made its market debut on Friday, while Dubai luxury housing developer DAMAC Real Estate is taking orders for a planned London listing.

"Issuers and sellers have been on a starvation diet for a few years with no IPO market, so the pipeline is quite full," said one banker working in the sector. "Conditions for IPOs continue to be very strong... But the window for this year is closing pretty rapidly."