There has been a flurry of UK IPOs (Initial Public Offerings) this year. I’ve commented on a few of them, including Moonpig and Kanabo.
But just because a company has decided to float on the UK stock market doesn’t mean I should pile in. Here are four things I’d consider before buying.
#1 – Exciting opportunities
I can’t deny that the latest UK IPOs have given investors, like myself, some exciting opportunities to invest in. I guess there’s more for me to choose from. It’s great when I see a private company go public where there isn’t a direct, existing listed company to compare it to.
I’m thinking of companies such as the cannabis firm Cellular Goods and the independent review platform Trustpilot. I must admit, it’s hard not to get easily swayed by the investment euphoria such UK IPOs create.
#2 – Existing investors
One thing I’m mindful of when it comes to UK IPOs is the existing investors. Typically, private equity firms and venture capital firms have been invested in the company for some time, and an IPO is part of their exit plan. This even means bringing loss-making companies to market from time to time.
These types of investors are looking for a high return on investment. So in order to achieve this, they are likely to ‘dress’ a private company for a flotation. In order words, put the best bits about the company forward. This is why I’m wary about UK IPOs and generally don’t get involved.
#3 – Lack of transparency
One of the risks when investing in UK IPOs is the lack of information available. And I’m all for being upfront and transparent. I think it’s worth highlighting that there’s a stark contrast between the public and private worlds.
Private companies are not required to give regular trading updates like their public counterparts. This means I have less information to base my analysis on. A private company will typically release a lengthy IPO prospectus, but this gives me minimal information.
In fact, I should point out there’s bias in the IPO documents available to investors. These have typically been written by the analysts and investment banks involved in bringing the private company to market. Of course, they will sell the company because its their job and they are getting paid to do it.
But I’m having to use this IPO documentation as my primary source of information. This is why I currently don’t invest in UK IPOs and adopt a wait-and-see approach to see how the shares will trade when listed.
#4 – High valuations
Of course, UK IPOs will be sold to investors to receive a high valuation. But I think investors should be careful of this. For example, Deliveroo, the food delivery firm, has had to reduce its valuation due to concerns over workers’ rights.
I reckon the true test is to see how the shares respond when listed. I’d expect some stock price volatility, but if the price drops significantly then it’s likely the IPO valuation was too high.
As I mentioned before, I typically hold fire on investing at or straight after UK IPOs and will monitor the share price to let the euphoria subside. I’m a prudent investor and don’t want to overpay for a stock.
Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.