By Renée Schultes
Does London have a problem with growth? Some bankers fear the rough ride meted out to a handful of U.K. stock listings in 2010, such as online grocer Ocado, betting exchange Betfair /zigman2/quotes/208407830/delayed UK:WEB 0.00% and electronic whiteboard maker Promethean World, has damaged London's appeal for entrepreneurial companies. With rival exchanges from Hong Kong to New York vying for listings, these bankers fear London could lose out.
On the face of it, the Ocado, Betfair and Promethean IPOs were certainly poor advertisements for London, given the steep falls all three suffered post-listing. Bankers say the intensity and scale of hostile commentary from analysts, investors and the media around some of last year's IPOs has alarmed would-be issuers. In contrast, European growth company floats—Pandora in Copenhagen and Yoox in Milan—didn't receive the negative attention of their London peers and have traded higher in the aftermarket.
But the difficulties experienced by two of the troubled London deals were largely self-inflicted. Promethean, down 65% on its issue price, slumped when bigger-than-expected U.S. schools budget cuts led to savage downgrades of growth forecasts. Betfair, down 23%, suffered a big loss in credibility when it unexpectedly warned of a slowdown in its core U.K. sports betting business at its inaugural earnings announcement. Ocado, on the other hand, continues to deliver on expectations outlined at its IPO and has recovered from a 33% share slide to trade above its issue price.
Besides, growth stocks are inherently volatile, and one or two quarters are a poor measure of the quality of a business. Historically, some of the best performing U.K. growth stocks, like online fashion retailer Asos /zigman2/quotes/209092221/delayed UK:ASC +0.04% , dropped in their first few months of trading. On average, the 18 new London listings last year with market capitalizations above $100 million traded up in their first week and are now 24% over their issue prices, roughly in line with post-IPO performance in other European markets, according to Dealogic. A U.K. investor base remains desirable, given London's deep pools of capital, independent research and robust regulatory environment.
The bigger issue for growth companies—and not restricted to London—remains Europe's very high equity risk premium. At 6.8%, according to Goldman Sachs estimates, it is currently more than double the average since 1990. This disproportionately damages growth companies because so much of their earnings lie in the future and are discounted at highly punitive rates, reducing their growth premium. Globally, the premium for companies in the top quintile globally by Ebitda growth is at its lowest in a decade, notes Goldman Sachs.
Bankers may be frustrated that individual growth stories are not sufficiently understood. But this likely reflects on the storyteller as much as the listener. In the meantime, what would really revive the U.K. new issue market is a resurgence of animal spirits.
Write to Renée Schultes at email@example.com