Skip to the content

Old Mutual’s Ormiston: More growth opportunities than we’ve seen for years

15 August 2017

Fund manager Ian Ormiston outlines why the re-opening of the IPO market in Europe has provided a boost to new ideas in his smaller companies fund.

By Jonathan Jones,

Reporter, FE Trustnet

The re-opening of the initial public offering (IPO) market in Europe has boosted the number of opportunities for smaller companies strategies, according to Old Mutual Global Investors fund manager Ian Ormiston.

Ormiston, who runs the €342m Old Mutual Europe (ex UK) Smaller Companies fund, said he has found more growth opportunities in the past 12 months than he has for many years.

This has helped the performance of the fund over the last year, which has been a top quartile performer in the IA European Smaller Companies sector, as the below chart shows.

Performance of fund vs sector and benchmark over 1yr

 

Source: FE Analytics

The fund has returned 27.49 per cent over 12 months, 4.88 percentage points ahead of the sector and 3.66 percentage points in front of the Euromoney Smaller Europe (Ex UK) benchmark.

“We have probably found more opportunities for growth in the last 12 months or so and the major driver for that has been the IPO market re-opening,” the manager said.

This is a function of the improving environment in Europe, where GDP has begun to pick up, earnings growth has started to come through, and volatility has been relatively low.

“The positive aspects of sentiment normalising is that you get market stability and low volatility which is the environment you need to IPO,” Ormiston noted.

“It is quite a long process for a company – whether it is owned by private equity or by founders or even by bigger companies wanting to spin it off – to convert from being a private business to a public business.

“An IPO process can last up to six months from the initial look to actually making it to the market.”

As such, he added that if markets are volatile, this length of time between announcing the IPO and may cause the listing to fall through because investors can lose confidence over whether these companies are going to make it through the entire process.


“There is almost nothing worse than getting to a book build and then hearing investors are pulling their interest because they’re worried about market conditions,” he said.

“They like the company, they like the price of it, but they are worried they are going to lose money on day one [so change their mind].”

However, because the environment and market have been more stable in recent months there has been more opportunity for companies to publicly list and this is an important function of the small-cap market.

Ormiston noted: “It is one of the things the small-cap market should do. We say there are 5,000 companies in our universe and 1,000 of them are liquid enough to invest in.

“It should be a dynamic process with new stuff coming in at the bottom as the really small stuff becoming liquid enough for us to be interested in it, and equally things going out of the top.

“We have had a lot of companies going out of the top so you need that flow of new businesses coming in at the bottom.”

According to PricewaterhouseCoopers, there were 53 IPOs in the first quarter of 2017, slightly ahead of the 50 recorded during the same quarter of 2016.

However, the total value of these IPOs (€4.5bn) was up 28 per cent on the previous year (€3.5bn) with the average offering 6 per cent higher year-on-year at €143m.

Value of IPO market in Q2 in each of the last 5yrs

 

Source: PWC UK

This shift was more pronounced in the second quarter, with 103 new companies listing – up from 95 in Q2 2016 – with the total value (€15.6bn) up 43 per cent and the average offering (€215m) 32 per cent higher.

It was the most active quarter in Europe since Q4 2015 and was boosted by a late rush with three of the top five IPOs pricing in the final two weeks of the quarter.


“In the last 12 months or so there have been more IPOs and if you tip more in then you will get more opportunities at the bottom,” Ormiston said. 

“You won’t go for all of them but if there are five done in a year you are unlikely to find any, whereas if there are 40 or 50 you can usually find four or five opportunities.”

He said that this is what makes smaller companies more dynamic, with new interesting ideas coming to the market, but noted that he does not always invest immediately at the time of IPO.

“For us sometimes we get involved through IPOs and sometimes we have re-looked at things six months after the IPO either because they have become more liquid and more traded or sometimes [we need] proof of concept.

“Sometimes you want to sit back and see a newly-listed company prove they can deliver returns in a listed context.”

Another benefit has been that these new companies are not necessarily coming to the market at excessive price levels despite the wider market trading at earnings levels above its long-term history.

“People’s risk appetite has gone up, volatility has dropped, but they’re not necessarily coming in more expensively, they are just being able to come into the market,” the manager said.

“It is the only time you have an opportunity to barter and haggle over price in the pre-IPO process,” he added. “They have no history so there is a risk in investing in an IPO and we want substantial discounts.”

For those companies coming to the market at a premium, it must provide a technology or growth potential that funds cannot currently gain access to in the listed space already.

“It has to fulfil a need that we can’t reach already or be cheaper than their peers,” Ormiston said.

Overall, he said around a third of new purchases in the fund this year have come from the IPO market, with some others added that have listed in recent years but only recently become large enough for the fund.

“We are not going to take excessive liquidity risk. The less liquid stocks in the portfolio should be the secular growth stocks that we think can double or triple. Therefore we are very nervous of anything of €500m market cap,” the manager noted.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.