A toxic cocktail of slowing growth, rising inflation and belatedly hawkish central banks has resulted in the current dire performance of risk assets. During risk-off periods, capital tends to flow to larger, liquid assets. Initial public offerings (IPOs) are generally more illiquid than longer-established peers due to lock-ins and newly established share registers. It is therefore no surprise that the share prices of companies that listed in 2020 and 2021 have struggled, but what is surprising is the magnitude, with 84% of IPOs trading below their issue price. Moves of this scale often present opportunities. The move to liquid assets tends to lead to illiquid names getting mispriced quickly. In this report, we endeavour to identify value and investment potential against a valuation screen of companies that have listed in the US, European and UK equity markets since the beginning of 2020.
The IPO fallout has been both broad and deep. Our analysis of 1,205 non-special purpose acquisition companies (SPACs) IPOs launched since the start of 2020 (in the US and Europe) suggests that, as at 31 August 2022, c 84% are trading below their issue price and almost 50% have at least halved. We have identified 94 public offerings that are down at least 90%.
Our screen focuses on valuation using two ratios (EV/EBITDA and EV/sales) and two balance sheet-related metrics (Price/book and net cash to market cap) and ranks 975 stocks that passed qualitative and quantitative screening. Attractive valuations and a financial position to weather the near-term economic headwinds were used as a basis for looking for businesses which, on a medium-term basis, could be revisited by investors. Our screen of the top 30 pan-regional stocks on an unweighted average, forward-looking basis trades at EV/sales of 0.6x, EV/EBITDA of 3.7x, Price/book of 0.6x and at 104% net cash to market cap.
As with all screens, more work would need to be done to assess the fundamentals of the businesses, but the objective of the exercise was to identify names which we should look at with a fresh perspective. The names identified inevitably face near-term headwinds, and in some cases go against current investor sentiment. Examples include: