Do Spivvy PE Funds IPO Their Investments at Inflated Prices? – and HM Treasury Consultation UK Listings Review

This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

The AA 86% share price decline, coming on top of the Saga and Aston Martin makes me wonder if PE firms and others are exploiting those retail investors willing to buy into a fashionable story.

I have to admit to losing money on Saga, whose share price is down 90% from its 2016 high. My mother-in-law was a huge fan of Saga and she gave me a present of Saga membership when I was 50, so when they were floated, I and other Saga members got some shares at a discount. I took up the offer and then watched the initial share price rise, great press and euphoria and then the sad decline, as the new management adopted a growth strategy and lost the traditional values of the founders. Investors lost over a billion here.

Aston Martin investors have lost around £4 billion as the 007 star has lost its mojo. Another hugely hyped share.

The AA is on the brink of bankruptcy, vultures are circling and a takeover at 35p got leaked (!) at the weekend. The Mail phoned me up last night for my views, which I gave in the strongest terms and are quoted in the Mail today Investors in AA have lost £1.2billion of their money. I hope the FCA will find out, publicly expose and fine the person(s) who leaked.

I know that 3 examples does not constitute a peer reviewed academic study of whether buying IPOs is good or bad for your wealth. However, Jay R. Ritter and Ivo Welch said IPOs underperform over 3 years, see

The Journal of Finance Vol. 57, No. 4, Papers and Proceedings of the Sixty-Second Annual Meeting of the American Finance Association, Atlanta, Georgia, January 4-6, 2002 (Aug., 2002), and Ji Huang in 2011 said “Our results indicate the mixed evidence on the long-term post-IPO stock performance.”

Long term investors should note that I am more concerned about the long term performance of IPOs. The underpricing of initial public offerings (IPO) is a well-documented fact of empirical equity market research. Ritter 2003 reports results from stock exchanges in 38 countries, all of which show evidence of first-day abnormal returns. The size of IPO underpricing is cyclical; for example, at the height of the dot-com bubble the average IPO was underpriced by more than 50%, whereas the long-term average of IPO underpricing is 10–20% in the U.S. (see Ljungqvist 2007, Fig. 1).

Investing successfully in the stockmarket requires many skills and strategies. One takeaway from the above is the need to avoid bad shares and try to sell out of shares where the prospects are poor or very risky, eg AA – cars hardly ever break down nowadays so the core business must be a declining market and it is hyper competitive; Saga – a drive to achieve unsustainably high profit margins, leading to a loss of previously very high customer satisfaction ratings; Aston Martin – lots of PR puff and difficult to see how the very ambitious growth targets would be achieved.

Which brings me neatly into the second half of this post- the HM Treasury consultation on UK Listings Review, see I am very worried about reducing the corporate governance standards in the UK stock markets. I would prefer stronger standards, such as the Sarbanes-Oxley requirements that apply in the US (or perhaps a SOX-lite approach). We have had far too many scandals in the UK, to countenance reductions in governance requirements. Off the top of my head, I can recall Carillion, Thomas Cook, Conviviality and Cake (Patisserie Valerie) – all accounting/auditing scandals. Then there are Shell (reserves), BP (safety – Deepwater Horizon), Rolls Royce (out of court settlement with no admission of guilt), BAe (bribery), Woodford (a regulatory scandal), Sirius (possibly – come to our 8 Dec webinar and hear the story), and now the IPOs saga -AA, Aston Martin and Saga.

Good news is their Question 4 about placings and the €8m placing rule, about which the Treasury is asking for comments. We think the €8m rule should be scrapped. All financially educated individual investors should be allowed to participate in these placings. Restricting them to institutions and best mates is a skim in favour of the establishment as they (and we) all know that the underpricing of initial public offerings (IPO) is a well-documented fact of empirical equity market research.

We shall be making these points in our response to HM Treasury. Do get in touch with your views and points you think we should make to the Treasury. You can add them in comments to this blog. If any member wishes to volunteer to help write our response, please let me know via an email to me at . We are always looking for more volunteers in our campaigning work.

Cliff Weight, ShareSoc Director

As part of my disclaimer on owning shares in Saga, I should add that I recently bought some more Saga shares, following a tip in the 9 Nov MelloMonday bash, at £1.65 and they are now £2.96! But beware, as owning shares in highly leveraged companies is high risk!

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