However, the research also shows that more than half of newly listed companies see underperformance compared to their market index after two years, rising to two thirds over five years.
The analysis of 10 years of UK IPOs shows that in their first month, new listings outperformed the FTSE All Share by 7 per cent on average.
After six months, they are 11.5 per cent ahead, while after a year the average listing has outpaced the index by 10.5 per cent.
However, 57 per cent of companies see slower growth than the index after two years, although across the board, there is an average outperformance of 7.6 per cent. FE Alpha Manager Giles Hargreave (pictured), who manages four Marlborough funds, including the £814m Marlborough Special Situations fund, has invested in a number of UK IPOs in the past year including Boohoo.com and Poundland.
When Boohoo’s shares listed on the AIM market on 14 March, they shot up 70 per cent on the first day. Poundland also saw a strong surge, trading 15 per cent above its 300p IPO price.
When investing in a company’s IPO, Hargreave says he has a shorter time horizon compared to similar stocks bought at market price.
“This is because with an IPO there’s always the initial excitement present on the first day’s trading, when liquidity is very high,” he explained.
“But you have to ask yourself if that is going to last and whether the company can meet expectations in the longer term.”
“It often means you are asking yourself whether to take profits more quickly than other stocks.”
When considering buying into an IPO Chelsea Financial’s Darius McDermott says there are three main considerations for investors.
“The valuation of the IPO is the first thing investors should consider, the second is the quality of the business or franchise that is being offered and third is wider market conditions,” he said.
“In strong market conditions IPOs are generally good bets. If you look at the tech IPOs in the States in the past year you can see they’ve all gone very well, as market conditions are strong and most have been valued fairly.”
“However, if you look at Facebook’s IPO, its value halved after its initial offering price and went down over the next six months as the market struggled to see where revenue growth would come from. But then after there was clarity over its revenue growth its share price has exceeded its IPO figure.”
“It’s not inevitable there will be a re-rating over time – it comes down to market conditions. If markets are going up, most IPOs tend to do very well very quickly, as a general rule, but when equity markets are falling [they don’t do as well.]”
The research also found evidence that average outperformance of a freshly listed company was evident after just one day’s trading, with 70 per cent of stocks seeing a price rise day-end.
On average, new listings rose 5.7 per cent on day one, outperforming the market by 5.4 percentage points.
However, the number of companies outperforming the market falls to 32 per cent over five years. Taken on average there is still an outperformance of 3.7 per cent though, even accounting for companies that went into administration or were bought out.
In 2014 the number of companies planning to offering up their stock to the public has hit pre-crisis peaks with at least 20 companies expected to list this year.
The improving domestic economy has buoyed the IPO market in the past 12 months, seeing the highest number of companies offered up since the financial crisis, including the biggest listing of a public company for more than 20 years: Royal Mail.
According to FE Analytics, the stock has surged 23.86 per cent since its launch in November 2013, compared to a rise in the FTSE All Share of just 4.4 per cent.
Performance of stock vs index since launch
Source: FE Analytics
“The IPO market has been reaching fever pitch so far this year, with a steadily increasing queue of companies looking to take advantage of strengthened market conditions,” said Justin Cooper, chief executive of Shareholder Solutions at Capita Asset Services.
“As things stand, our preliminary forecast made last summer that the value of IPOs would increase by 50 per cent this year is already looking conservative.”
Cooper agrees with Hargreave that IPOs tend to lose their charm over the initial bounce in share price. However, he says this is the case for any steep rise in a stock.
“Our research shows investors should be confident about buying into new issues, as long as they do their homework.”
“Pricing is paramount. Leaving too large an upside for investors suggests companies have undersold themselves, which can be very politically sensitive if the owner is the taxpayer, as the Royal Mail example shows.”
“On the other hand, overpricing means a bad start for the stock, alienating investors from the outset; a bad way to kick off your investor relations campaign.”
“Broadly, companies seem to have been getting it right – even through the turmoil of the last few years.”
