Radacanu or Robson?

I feel for all those ladies who nearly became champions of women’s tennis. They put in the hours and the emotion to win a round or two in SW19, which set expectations very high. Laura Robson is a very good tennis player, and we can only admire all that effort for modest reward over the last decade or two. And then Emma Radacanu arrives, the new Regina of tennis, and turns it all on its head. She’s from Bromley and in many ways, she is the next great thing to come out of BR6 since John Warren. Enough said.

Our IPO ‘blotter’ has >30 names at the moment. That means we are aware of 30 companies that want a piece of investors’ capital in the next few months. Some of these are companies we know well and have met a couple of times, others are new names in an investment bank deal pipe. We think the vast majority will be Robsons, but we hope a couple can be Radacanus. For us, that is an IPO which we own from day one that grows into a much bigger company, allowing us to make multiple times our initial investment – in short, we believe the high hopes that companies have at IPO are only fulfilled by a small minority. Knowing which companies will be the winners is virtually impossible, however, you probably do have a reasonable chance in the IPO process to split the list into the possible and the passable.

What do we look for in potential long-term winners?

• A good start is being a public company because the issue price did not squeeze every pip out of the valuation for the vendors’ benefit

• A significant ongoing holding from the pre-IPO owners, the most long-term being families and founders rather than financial backers

• Evidence that the company is trading well into the IPO process – it has a good position in healthy end markets and its customers think it is doing a good job

• A management team and board that have worked together for a while pre-IPO and have a reasonable understanding of what being a plc means

• A plausible and defendable rationale for becoming public beyond taking millions off the table

• Clear industry expertise in their leadership roles

If we have found these characteristics, there are also some early signs that a company might go on to be a long-term winner, which we might look out for in the first couple of years after they become a public company. As is often the case in sport, early success can be found out as opponents dream up better tactics to counter your strengths. You might also lose your passion for the game, or simply not be fit for purpose. These issues are the difference between stock market aces and serial double faulters – the following list includes some encouraging signs we might look out for:

• Trading ahead of forecasts in the company’s very early public statements gives a good sign that expectations set at IPO were realistic and management are aware of the importance of realistic guidance

• Corporate activity such as acquisitions or disposals meet the criteria set out at IPO and valuations paid are sensible with appropriate vs excessive use of equity

• Secondary sell downs are tied to trading announcements and occur in a regular and reliable pattern

• The company is willing to spend time with existing and new shareholders without excess distraction from the day job

We’d love to think that this current crop of IPOs can unearth a couple of Radacanus, but we are not super optimistic right now if we are being honest. There seems to be quite a bit of opportunism and some of the valuations being mooted do not look sustainable, however, the market is usually efficient in this process and ultimately the choice is always ours. Often our biggest winners do not make great starts to life and take a while to flourish, more Olly Robinson than Radacanu, but still very effective all the same. The sporting analogy ends with the failed IPO; however, a professional tennis player who has not reached either Emma or Laura’s heights has a good career as a coach and can always say they were much better than nearly everyone else for a while. The failed IPO remains just that and is a pain in the portfolio for as long as it takes to find rehabilitation, administration, or a suitor. This is why it is so important for us to choose very carefully and move on quickly, if possible when we have been sold a pup.

The views and opinions contained herein are those of Paul Marriage, Fund Manager. They do not necessarily represent views expressed or reflected in other BennBridge investment communications or strategies and are subject to change.

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