IPOs vs the virus

Some internet wandering led me to stumble on the following chart from PWC that left me a little dumbfounded, and prompted a stroll through some IPO facts and figures.

Who in their right minds would try to get their business listed on a stock exchange in the middle of a pandemic, and potentially in the teeth of a terrible recession? It turns out that 477 businesses did just that in Q3 this year, raising $116bn in the process.

According to EY “Q3 2020 was the most active third quarter in last 20 years by proceeds and the second highest third quarter by deal numbers”.

So where is this extravaganza of new listings? 23 of them turned up in London (details here at the LSE). The fun was mostly being had in the US. They were flying off the shelves at such a rate that the numbers are increasing by the day it seems. As of 24th November, 2020, according to stockanalysis.com: "There have been 401 IPOs on the US stock market this year, as of November 24, 2020. That is +81.4% more than the same time in 2019, which had 221 IPOs by this date."

Is there a spooky correlation between the number of people dying from respiratory illness and the volume of IPOs during the year? One for Tyler Vigen maybe...

Looking at that busy US IPO activity for 2019, (as at November 2020) 59% of the IPOs are higher than their initial listing price, 40% are lower. The top 10 are below:

IPO Date	Name	IPO Price	Current	Return
Apr 18, 2019	Zoom Video Communications	$36.00	$430.28	1095%
Jun 13, 2019	Fiverr International	$21.00	$200.00	852%
Oct 10, 2019	BioNTech SE	$15.00	$106.50	610%
Nov 21, 2019	SiTime	$13.00	$85.20	555%
Jun 28, 2019	Karuna Therapeutics	$16.00	$100.00	525%
Jun 6, 2019	GSX Techedu	$10.50	$63.90	509%
Mar 7, 2019	ShockWave Medical	$17.00	$98.64	480%
Apr 17, 2019	Turning Point Therapeutics	$18.00	$104.37	480%
May 2, 2019	Beyond Meat	$25.00	$140.96	464%
Dec 5, 2019	LMP Automotive Holdings	$5.00	$27.71	454%

The bottom 10 from 2019:

IPO Date	Name	IPO Price	Current	Return
Nov 8, 2019	ECMOHO Limited	$10.00	$1.43	-86%
Aug 15, 2019	9F Inc.	$9.50	$1.29	-86%
Feb 12, 2019	Anchiano Therapeutics	$11.50	$1.41	-88%
Nov 13, 2019	YayYo	$4.00	$0.4500	-89%
Feb 15, 2019	Stealth BioTherapeutics	$12.00	$1.30	-89%
Jul 31, 2019	Borr Drilling	$9.30	$0.800	-91%
Jan 4, 2019	China SXT Pharmaceuticals	$4.00	$0.290	-93%
Apr 5, 2019	Guardion Health Sciences	$4.00	$0.247	-94%
May 10, 2019	Sonim Technologies	$11.00	$0.585	-95%
Aug 1, 2019	Sundial Growers	$13.00	$0.241	-98%

2020 has been just as exciting. 61% of the new listing from this year are in the green, whilst 36% have lost money.

2020 top 10 IPOs:

IPO Date	Name	IPO Price	Current	Return
Aug 14, 2020	CureVac	$16.00	$85.06	432%
Aug 27, 2020	XPeng	$15.00	$72.17	381%
Apr 8, 2020	Keros Therapeutics	$16.00	$76.21	376%
Jul 17, 2020	ALX Oncology Holdings	$19.00	$82.28	333%
Feb 6, 2020	Schrodinger	$17.00	$67.65	298%
Jul 30, 2020	Li Auto	$11.50	$43.64	279%
Jul 17, 2020	Berkeley Lights	$22.00	$83.36	279%
May 22, 2020	Inari Medical	$19.00	$68.00	258%
Jun 5, 2020	Dada Nexus	$16.00	$52.03	225%
Aug 13, 2020	KE Holdings	$20.00	$62.97	215%

And the bottom 10:

IPO Date	Name	IPO Price	Current	Return
Feb 6, 2020	Casper Sleep	$12.00	$6.04	-50%
Jan 17, 2020	Velocity Financial	$13.00	$6.25	-52%
Sep 30, 2020	Boqii Holding	$10.00	$4.78	-52%
Feb 13, 2020	Muscle Maker	$5.00	$2.30	-54%
Feb 24, 2020	Zhongchao	$4.00	$1.82	-55%
Jan 30, 2020	AnPac Bio-Medical Science	$12.00	$3.49	-71%
Jan 17, 2020	Phoenix Tree Holdings	$13.50	$3.76	-72%
Jun 19, 2020	Progenity	$15.00	$3.64	-76%
Jan 17, 2020	Lizhi Inc.	$11.00	$2.48	-77%
Jun 30, 2020	Aditx Therapeutics	$9.00	$1.91	-79%

Exciting stuff, a bit racy for me.

The requirements for a new listing vary slightly from one exchange to another, as do the regulatory requirements. The LSE have a nice write up here and nicely summarised below. 

It all sounds like a nice wheeze to get some cash, perhaps the founders have the chance to offload some of their own investment tied up in the company. But a more sobering element is the cost. PWC again have a nice tool to allow a view of the potential costs.

As an example, a tech firm with revenues less than $100m wanting to list at a valuation in the range of $100m to $250m would end up having to hand over between $8m to $24m according to PWC. 

Some of these IPOs are SPACs - Special Purpose Acquisition Companies. There is a detailed and comprehensive write up from Harvard if these excite you. SPACs are companies with no commercial operations that are designed and built just to raise capital via an IPO. It then buys an existing business. They are known as "blank cheque" companies and have been around for decades, but the recent boom in IPOs have brought these to the public attention through some high profile listings.

I think IPOs are not for me, although one or two of the US businesses do look interesting. I prefer my investments to be a little less volatile.

October 2020 portfolio update

A wobbly set of markets in October. Not quite collapsing, but looking like they were considering it. Most markets drifted from green to red over the course of the month. In addition to the virus, in the UK Brexit headlines had Sterling whizzing around which tends to impact the overseas earners on the FTSE. 

Virus news continued to deteriorate across Europe and the US, with the predictions for a tough winter playing out. As health systems started to get stretched more restrictive social distancing measures were deployed. I get the impression many people are now suffering some fatigue from this, and can't wait to get out, even the morning commute is starting to look appealing to me.

The two elderly US gents vying to run their country managed to continue to squabble over social media, and just about managed a civilised second debate. The Trump team have publicly announced that they have given up trying to control the virus. Perhaps of no surprise is that the blue and red teams couldn’t agree on any more economic support for the country until the election is out of the way. Can a country of 330m people really not do better than these two? Ah well it will be over soon…maybe.

The portfolio stumbled this month, along with the wider markets. October brings to an end a nice run of monthly increases over the last 7 months, which equalled it's previous best run.

Portfolio performance
The portfolio was down -3.3% in October, ahead of my chosen benchmark (Vanguard FTSE All Share Accumulation) which was down -3.8% over the same period.

Best performers this month:
Dignity +23%

Abcam +20%

SAGA +10%

Worst performers this month:
Qinetiq -15%

Sage Group -12%

RELX -12%

October share purchase 1: RWS

RWS provide a range of highly technical translation services. Their business is divided into 4 segments:

• IP Services: patent translations/ filing/ research
• Life Sciences: language solutions for clinical trials and other aspects of technical support
• Moravia: localisation of products and content for international businesses
• Language Solutions: translation and interpretation services

They were listed in 2003, and have continually grown and developed their business both organically and through acquisitions. Earlier in the year RWS announced a merger with fellow translation firm SDL which specialises in AI based translation services. It follows acquisitions of various technology based firms over previous years, and now puts RWS as the market leader in the field. Following Terry Smith’s advice I decided to invest in RWS not because they might be the next big winner, but because they have already won.

RWS started life as translation firm Randall Woolcott Services. The Chairman, Andrew Brode bought the company along with 3i in 1995 and currently owns over 30% of the shares. He seems to have been doing something right as over the past 10 years, net margins and return on capital have both averaged in the mid-teens. Dividends have increased each year, at a compound rate of over 10%, and is currently covered more than 2.5x cash flow.

Their competitive advantage comes through providing highly technical and niche expertise, which increases client dependence on RWS. The acquisition of SDL cements their market leading position and increases scope for dominant pricing power. I prefer defensive companies, and suspect that RWS falls into this categorisation. Although clients will likely reduce discretionary spend during economic downturns, the critical and highly technical nature of RWS services should make for dependable income irrespective of macro-economic issues.

I see the main risks to RWS being the development of AI to provide such sophisticated translation and localisation services that the likes of RWS become superfluous. This is why RWS have been making their recent acquisitions, to ensure that they are part of the development of this AI. Over time we shall see how things pan out.

October share purchase 2: IHR

The second purchase this month was a small investment in Impact Healthcare REIT, this business owns real estate that is leased to care home providers. The trust has over 100 properties that are used by 11 different care home operators, with the rental income being split 3 ways - 60% from local authorities, 30% from private firms and 10% from the NHS.

Despite the COVID-19 disruptions the trust has collected all of it's rental income for the year to date, and has continued to pay dividends. Loan to value stands at 18%, and the weighted average lease is getting on for 20 years. The trust has been quietly improving on it's portfolio over the year, which is a trait I'm looking for at the moment - businesses that continue to operate relatively normally, not crippled by the pandemic.

The share price is down around 10% since the start of the year and I might well add to this holding if it stays that way. The risks of doing so would include changes to government policy over care home funding, and the care home providers needing to protect their occupants from the virus until we have better medical treatments available.