The Bridgepoint Group (LSE:BPT) share price exploded this week on its first day of trading. The private equity firm saw its IPO exceed expectations as the stock surged more than 25% from its issue price of 350p. As a result, this upward momentum pushed its market capitalisation from around £2.8bn to £3.6bn in the space of 24 hours.
That’s quite an impressive amount of growth in my eyes. And it allowed the business to raise roughly £300m in the process. But what exactly does Bridgepoint do? And should I be adding some shares to my portfolio? Let’s take a look.
The explosive Bridgepoint share price
Like most private equity firms, Bridgepoint is effectively a holding company. In other words, it raises capital and then purchases substantial stakes in various businesses, much like any retail investor does in the stock market. The difference is that, apart from having significantly more money at its disposal, the business doesn’t invest in public companies but private ones.
In total, Bridgepoint has around €27.4bn of assets under management (AUM). The capital is allocated across six different investment strategies that focus on equity (ownership in a company) and credit (lending money to a company). With a 30-year track record of what it describes as “delivering compelling returns with an attractive risk profile”, I think it’s understandable to see the Bridgepoint share price surge as it makes its public debut.
So how does it make money? The majority of AUM are owned by wealthy patrons who let the firm invest on their behalf. Bridgepoint then generates income by charging management fees for providing this service. And since these fees tend to scale with consistent performance, the interests of the firm and its wealthy patrons tend to be closely aligned. That’s a good sign in my experience.
Some risks to consider
By going public, Bridgepoint enables everyday retail investors to gain some exposure to private equity markets. Why does that matter? Well, it’s an alternative investment option that is a non-correlated asset class compared to stocks or bonds. That means shareholders can further diversify their nest eggs and protect them from the current volatile state of the public markets.
But even in the private markets, risks remain high. The management fees are the primary source of income for this business. But if it cannot deliver the returns expected by its patrons, these investors may move their capital to a competing firm. After all, why would they pay substantial management fees if the performance is lacklustre?
To maximise investment returns, Bridgepoint has to employ a strong team of leading financial and business experts. But these experts don’t come cheap. That’s why personnel salaries represent 71% of total operational expenses. Suppose the company is unable to retain a talented workforce, or if their performance begins to wobble? In that case, I wouldn’t be surprised to see the Bridgepoint share price take a significant hit.
The bottom line
I can’t deny that the ability to add a non-correlated asset to my portfolio sounds alluring. But I’m not personally interested. I like to take charge of my own investments. And so, buying shares in a business that invests on behalf of others is not something that tempts me.
Instead, I'm far more interested in a different IPO...
Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.
Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.
The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.
But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.
Zaven Boyrazian 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.