Saturday, January 19, 2019

Comment: The Year of the Retail IPO


A renewed sense of economic optimism is paving the way for a buoyant UK IPO market and creating a healthy pipeline of potential listings. In the first few months of 2014, we have seen 11 companies list on our markets, raising almost £2 billion, compared to 5 for the same period last year, raising £350million. One particular area attracting attention is the retail sector, where we are seeing a diverse range of companies looking to come to market.

Why is the sector gathering so much attention?

To truly understand the dynamics, it is important to consider the broader economic narrative that has unfolded in the last few years. Uncertainty is a natural catalyst for weaker financial markets and in 2012 IPO volumes were noticeably lower and overall market sentiment was poor. From investors‘ perspectives, there is always a degree of the unknown in IPOs, given those companies‘ lack of public track record and the fragile economy did not instil much confidence in investors to put money into equities. However, since late 2013, the nascent economic recovery has helped to renew optimism in UK equity markets and investor appetite has started to shift. The gradual strength of UK economic recovery is making exposure to consumer brands an attractive prospect.

The second half of 2013 saw a return to investor participation in UK IPOs, with not only institutional appetite returning but strong private investor participation gaining momentum. Demand from individual investors for well known domestic, consumer-facing brands such as Royal Mail Group and Merlin Entertainments, owners of Madame Tussauds and Legoland, was overwhelming. The investment community as a whole has been underweight equities for some time but the success of these and other high profile flotations have returned investment in public companies to the forefront of national awareness. Foundations have been laid for more savers to see the long term opportunities available in equity markets across a wide range of different sectors.

Notable too is the increase in private equity backed issuance – an important factor when examining this years‘ retail IPO pipeline. Economic confidence is enabling the private equity world, a major investor in retail brands over the last 10 years, to exit businesses in their portfolios. Capital markets once again are providing viable exit opportunities for private equity and VC firms.

With these dynamics in force, we are seeing household names such as Poundland and Pets at Home considering London market listings, along with Lenta the Russian hypermarket chain – together they could raise almost £1.5 billion. and McColl‘s have already made their public market debuts, raising £423 million and £133 million respectively. Investor appetite is strong and we expect to see more high street names come to the market in the next few months, with March to April expected to be particularly busy.

Capital markets have always played a significant role in the lifecycle of retail businesses, with the sector particularly suited to public life. These companies are often capital intensive and becoming a public company facilitates the process of raising capital or obtaining financing in the future. Through employee share ownership plans, teams become more motivated, retention rates higher and the business becomes more attractive to potential hires.

The UK markets have long been a home to many iconic retail names, Marks & Spencer, Tesco and Sainsbury‘s are all stalwarts of the FTSE 100. These are exciting times for the retail sector and the public markets.