Shares in UK cybersecurity company Darktrace soared on its first day of trading on the London Stock Exchange on Friday, in the latest sign of Britain's flourishing initial public offering market.
Darktrace's share price jumped as much as 44 per cent in early trading to £359.65, after the company raised £165.1 million ($230m) in the IPO, giving it a market value of about £1.7 billion.
When Darktrace first unveiled its IPO plans this month, chief executive Poppy Gustafsson described the debut as a "historic moment for the UK's thriving technology sector".
The listing came about five weeks after the disastrous debut of food delivery start-up Deliveroo.
Deliveroo's share price plunged 26 per cent on the first day of trading on March 31, wiping more than £2 billion ($2.77bn) off the company's £7.59bn valuation after the flop initial public offering was plagued by criticism.
Despite the Deliveroo flop, the UK is on track for its strongest-ever annual performance for IPOs, as pent-up demand during the Covid-19 pandemic and optimism around vaccinations drive the surge in listings.
London achieved its strongest IPO showing in the first quarter in 14 years, the consultancy EY said, with more funds raised in the first three months of this year than in any other first quarter since 2007.
The £5.6bn in total funds raised was the most in a single quarter since 2014, with internet retailer Moonpig, Danish online review site Trustpilot and fashion retailer Dr Martens leading the charge.
With the Deliveroo listing set for inclusion in EY's second-quarter calculation, analysts expect the momentum to continue to record levels by the end of the year.
“You’ve got this pent-up activity that's still coming to the fore,” Chris Beauchamp, chief market analyst at global online trader IG, told The National. “So what was already a fairly promising time for IPOs in the UK with an expanding economy and a return of investors to UK assets after years of hesitancy – you will see quite a bit more demand coming through.”
The surge in listings offers a much-needed boost to the City of London, which struggled to attract new listings during Britain’s drawn-out exit from the EU.
It comes at a time when the country is emerging from the worst hit to its economy in 300 years and as the UK looks to overhaul its listings structure in a bid to attract more tech.
The Hill Review, unveiled alongside UK Finance Minister Rishi Sunak's budget last month, recommended updating rules around free-float requirements, dual-class structures and special-purpose acquisition companies to strengthen the UK's position as a world-leading financial centre.
The £5.6bn in first-quarter fundraising was more than half of the £9.4bn raised in the whole of 2020, EY said. Both the main market and the Alternative Investment Market benefited from the resurgence in activity with 12 IPOs raising £5.2bn on the main market and eight raising £441 million on the AIM.
The bumper performance during the first three months was in stark contrast to the same period last year, when there were only three IPOs on the main market and two on AIM, with the £615m raised nine times lower than this year’s opening quarter.
Scott McCubbin, EY partner and UK&I IPO leader, said the surge in IPO activity started in the final quarter of last year after the subdued first half of 2020 when the world was facing its worst health crisis in 100 years and the UK was still mired in Brexit controversy.
“Confidence continues to build with the Brexit deal giving clarity around the future relationship with Europe and the rollout of Covid-19 vaccinations. It is likely that the uptick in activity will hold at this level and continue through the year,” Mr McCubbin told The National.
More than 100 IPOs worldwide were put on hold in the first half of the year, FactSet said, as the pandemic caused extreme market volatility and made deals hard to price.
However, in the third quarter of last year, three IPOs in London raised £3.3bn, including e-commerce firm The Hut Group, which made the biggest debut on the LSE in seven years with a £1.9bn float on September 14.
Activity stepped up in the fourth quarter, with 17 IPOs raising £3.4bn, Mr McCubbin said. Activity accelerated on AIM, meanwhile, with 10 IPOs in the fourth quarter raising £192m, compared with three in the third quarter raising £76m.
“The bounce-back in UK IPO activity in late 2020 and into 2021 was due to two key factors: pent-up demand and the acceleration of business plans due to Covid,” Mr McCubbin said.
“In terms of pent-up demand, this tracks back to 2019 which was a subdued year for IPOs due to uncertainty around Brexit and other geopolitical factors. We only had a couple of months of stability before the pandemic started to impact capital markets. However, after the first lockdown – once the market proved it could operate successfully without the face-to-face aspect – then confidence and IPO activity increased.”
The acceleration of business plans saw companies coming to the market sooner amid faster-than-expected growth during the pandemic – particularly for online businesses.
Deliveroo was one such company. The start-up's flotation last month was driven by a surge in orders for its service when Covid-19 regulations meant customers across the globe were forced to stay at home, making ordering food more likely.
The largest initial public offering in the UK capital for a decade, the listing raised £1.5bn with its offering priced at £3.90 per share, the bottom of its target range.
On Thursday, the share price was at £2.56 at 8.21am London time, 34 per cent below its offer price, after the flop IPO was plagued by criticism with institutional funds put off by the company’s gig-economy model, and its dual-class share structure that allows founder Will Shu to retain control of the business for three years.
Mr Beauchamp said the Deliveroo IPO “soured everything” and raised the spectre that London is not a market that will accept “any IPO at any price”.
“It’s a warning signal. For a few years now, it’s not been a market where you can just get anything away at any price. There has to be a firm business case and it can't be a too-richly valued IPO.
“Investors have become a lot more discerning and a lot more demanding of companies.”
However, he said investors should not draw “too many broad brushstroke conclusions” from the Deliveroo flop because it came off the back of the huge growth in activity and faces major hurdles.
One of those is profit sustainability with a drop in demand expected as consumers start to dine out rather than at home after the end of lockdown.
The company also faces legal action over pay from its gig-economy workforce, which could lead to both compensation and better benefits for staff that would hit the company's margins.
“It's a message to the IPO market that you have to be slightly conservative on your valuations, but fundamentally it is also a specific situation to Deliveroo,” Mr Beauchamp said.
Other analysts fear the Deliveroo saga will deter tech companies from listing in the UK, with British electric vehicle start-up Arrival choosing to list on the Nasdaq in March.
With an initial valuation of $13.5bn, Arrival became the largest-ever British company listing when it went public through a special purpose acquisition company merger with CIIC Merger.
But the UK's ability to attract tech IPOs is still gaining traction. Technology IPOs raised more than 25 per cent of the total funds in 2020, Mr McCubbin said, offering a “promising” outlook for the City.
“These technology IPOs are likely to become increasingly prominent with FinTech, Tech and BioTech sectors expected to be key growth sectors for the IPO market in the future,” he said.
There are already a number of tech listings in the second quarter, with London-based online pension provider PensionBee floating on the LSE at the end of last month with a valuation of £365m.
Wise, formerly TransferWise, is also planning to list in London this year and is reportedly considering a dual-class structure.
Like Deliveroo, the low-cost foreign exchange services company plans to retain control through the listing, with the potential IPO set to make the start-up one of the most valuable tech companies in the UK.
Alphawave IP’s declaration this month of its intention to float on the LSE is interesting investors, said Russ Mould, AJ Bell’s investment director, as the potential IPO, which could value the Canadian firm at as much as $4.5bn, is a rare UK listing for a semiconductor technology company.
“The global silicon chip industry is booming, British investors are on the lookout for hot technology stocks and the UK government’s examination of NVIDIA’s planned purchase of ARM – a company which has the same operating model as Alphawave IP – highlights the importance of the semiconductor industry to the economy, both here in Britain and worldwide,” Mr Mould said.
Founded in Toronto in 2017, Alphawave makes technology to improve semiconductor power efficiency and speed. The funds will let the company expand in Europe, the UK and Asia, invest in marketing and recruit talent, it said.
“After the brouhaha generated by Deliveroo’s share structure, investors will be looking carefully at who owns Alphawave IP’s shares, management’s track record and the composition of the board, to ensure the board offers the right mix of skills and experience to help the firm transition from being a private to a public company," Mr Mould said.
Mr McCubbin said the heightened level of activity in the UK's tech IPO market is likely to intensify the competition for investment, with companies needing to prepare early and raise their profile to attract interest.
“The reputation of the UK as a tech IPO market will in part depend on the performance analysis of listings that fall within this broad sector, which includes both traditional tech companies and those that heavily rely on technology," he said.
"Investors will be looking carefully at a range of factors with a keen focus on issuers’ business models, governance and use of proceeds – all indicating that robust preparation is key to a successful IPO.”
However, Mr McCubbin was confident London is on course to retain its position as the leading market for IPOs in Europe, with the Hill Review helping to ensure the UK markets remain competitive on the global stage.
"The UK is internationally renowned for the quality and expertise of its market. As such, it has developed to a size and scale that would prove difficult for another European centre to compete with any time soon," he said.
“Not only is it the top location in Europe for IPOs but also follow-on funds and it offers a huge depth of capital that would be tough to rival.”