IPOs “dead” as an exit strategy, says KPMG

Market sentiment has led to the lowest level of European IPO activity in a decade, but investment and venture capital trusts have taken less of a hit.

IPO activity on the London Stock Exchange all but ceased in the first quarter of 2001, according to professional services firm KPMG. The statistics show that just three companies made it to market, underlining the lack of exits available to the investment community.

“The IPO market is dead,” said Neil Austin, head of new issues at KPMG corporate finance. “This is the lowest level of activity we have seen for a decade and there is no evidence of a pick up.”

However, the statistics also show that the flow of investment trusts and venture capital trusts (VCTs) onto the market has not been affected by market sentiment in the same way. The first quarter of 2001 saw 12 investment trusts and VCTs join the market, only three less than in the previous quarter.

One possible reason for this is the coming end of the financial year. The months leading up to April traditionally see a lot of VCT activity in particular as investors scramble to protect their capital gains from the taxman. “VCTs are a tax vehicule created by the Inland Revenue,” said Irene Redman, a spokeswoman for investment firm Seymour Pierce. “And when do people usually sort out their taxes? At the last minute, so there is usually an increased flurry of activity.”

Many VCTs float on London’s Alternative Investment Market (AIM) for smaller companies. “AIM floats have not fallen by so much,” said Austin. “Certainly VCTs tend to see a lot of activity at the end of the tax year. Of course you don't necessarily have to deal with your capital gains at the end of the tax year, but for income tax purposes you do.”

The issue here is whether investment trust and VCT flotations will dry up in the same way as IPOs after April 5. “You can’t compare IPOs and VCTs. It’s like comparing a vegetable and a fruit – both go bad, but they are not the same thing,” said Redman. However, she agreed that VCT activity would fall away. “Some people deal with their capital gains as soon as they receive them, but in general, VCTs will not see as much activity.”

“Investment trusts tend to keep going,” said Austin. “But if they are to be successful they need to get the subscriptions. One or two trusts have been pulled because they couldn’t raise the money. It's natural that during a turbulent time investors are less keen to buy financial products.” Seymour Pierce and Harvest both withdrew VCTs in March owing to negative market sentiment.

The three companies to have completed a diffiult UK listing are France Telecom-owned mobile operator Orange, which raised £3.99bn; café chain Caffe Nero, which raised £9m; and recruitment agency Michael Page, which raised £536m. Together, these issues come to just £4.53bn.

KPMG sees a similar picture across Europe, citing very few IPOs in key markets such as Germany, France (which, like the UK, was dominated by the Orange float), Italy, Denmark, Switzerland and Sweden and none in the rest of Europe. This quarter a total of some E9bn was raised throughout Europe -only a third of the money raised in the same period last year.

The contrast with the previous quarter, last year’s busiest, could not be greater. During that period, 31 companies joined the London Stock Exchange, although activity did tail off by December, indicating that the market was slowing.

KPMG’s Austin does not see more IPOs happening anytime soon. “No-one is yet able to call the bottom of the slump and restore the degree of comfort needed to encourage institutions to get their cheque books out,” he said.

“It is difficult to predict how the year will progress,” continued Austin. “Looking at data for the last five years IPO levels have not borne any particular correlation with the direction of the market. Whilst it is fair to say that the market never remains closed for long, the killer is uncertainty and we are unlikely to see any resurgence in activity while confidence is low.”