These 3 firms could benefit from the flotation revival.
The improving market for Initial Private Offerings also means better fortunes for the ecosystem of companies behind the flotations. At their best, such firms have a strong track record and proven management, which is more than you can say for many IPOs!
Here are three worth looking at to ride the next IPO wave without punting on a newcomer.
Numis (LSE: NUM) was co-lead manager in the recent Promethean World (LSE: PRW) flotation, working alongside the likes of Investec Bank and Goldman Sachs.
Having sold its retail broking and fund management business a decade ago, it's probably now best known to Fools for its institutional research, with its well-regarded (and well-remunerated!) analysts following over 400 companies' trading updates.
In addition, Numis was named the leading brokerage firm for UK companies up to £1 billion in size in a recent Thomson Reuters Extel survey, and fourth across the whole market. It has been gathering clients in the downturn, recently picking up 10 new corporate clients and serving 122 as of December 2009 -- more than it did at the market's 2007 peak. And while it's best-known for its small cap focus, it now serves 18 companies in the FTSE 250.
IPO-related income grew strongly in the second half of 2009, with the chairman revealing at the February AGM that since 30 September 2009, its clients had raised £628 million via 13 separate transactions -- which compares very well to the £787 million achieved in the whole 2009 financial year.
The strengthening business case is important, because Numis' actual figures were hammered in the downturn. The company posted a statutory loss of £10 million to 30 September 2009, compared to a profit of £16 million the year before. Regardless, it increased its dividend for the tenth year running, and its balance sheet is rock solid, with about 45% of its market cap backed by a £78 million cash horde.
Still run by its entrepreneurial founder Oliver Hemsley, I think Numis is a textbook example of looking beyond one year's bad earnings to see how a business is managed over the cycle.
A financial crisis and bear market will never be good news for a broker, but Numis seems to have pulled through. With profits expected to bounce back to £9 million this year, it's on a P/E of 16 -- or more like 10 if you discount the cash pile. That seems a steal if you're bullish about the markets.
Dealogic (LSE: DL) is an AIM-listed company that provides information and data services to financial companies, particularly investment banks. Much of its business is geared towards capital raising and new placings, so the flood of rights issues and other money raising activities that followed the credit crunch served it well.
The company, which reports in dollars, released its final results for 2009 just this week, posting revenues of $92.8 million and profit before tax of $36 million -- way ahead of last year, and almost identical to 2007 despite its banking clients shrinking their headcounts in-between.
The company even increased its dividend to 9.4 pence, for a 5% yield on yesterday's closing price of 190p. It has no debt and held US$52.9m of cash and government securities at the end of the year.
Dealogic has been buying back its shares, too, although these are held in readiness to go back out the door to employees -- and the company has an obscure contractual relationship with its chief executive Tom Fleming, which could see him granted millions of shares. As I understand it this isn't actually dilutive regarding earnings, as the potential impact is already accounted for in the books -- though the CEO effectively has more control of the company than it might otherwise seem.
Dealogic's shares shot up 12.5p on the 2009 results, though the company itself was quite cautious, with chairman Peter Ogden saying: "We are not entirely confident that the disruption to markets is behind us, and so take a cautious view of trading in the coming months".
Still, Dealogic is on an historic P/E of just 8, which seems overly pessimistic given its cash safety net and the apparent market thaw.
Even massive diversified investment trusts such as RIT Capital Partners (LSE: RCP) and the Foreign & Colonial Investment Trust (LSE: FRCL) were hobbled by their relatively small exposure to private equity during the credit crisis.
For smaller listed private equity firms and trusts, the pain was immense -- average discounts to NAV hit 70%, and some were forced to raise money at ridiculously low valuations, or to sell investments to stronger rivals at rock bottom prices.
The outlook is brighter today. Stronger markets for IPOs mean more likelihood of private equity-financed firms being floated or sold for good prices -- discounts to NAV were just 16% by the end of 2009. In the US, the private equity giant KKR has revived plans to float itself on the back of a 34% write up in the value of its investment portfolio.
One safe way to dip a toe in the private equity pool is through the shares of HG Capital (LSE: HGT). The company has a superb track record. Its ten-year total return of 14.4% per year has trounced the 1.5% from the FTSE All-Share.
HG Capital is valued at £214 million and while the discount of 6% isn't much to right home about, it's cash-rich balance sheet insulated it from the worst of the credit crisis as well as enabling it to pick up new assets cheaply during the carnage. The company is now raising another £50 million at 845p to invest at what it's calling the bottom of the private equity cycle. The shares yield 2.9%.
More from Owain Bennallack:
Owain owns more shares in Numis than he probably should, plus RIT Capital Partners.