There are three ways to realise value from a business: trade sale, purchase by private equity, or flotation on the stock market. Flotations, the raising and realising of capital, are a central justification for having a market in the first place, so where are they all?
The short answer is that while stock markets were depressed, would-be vendors got better prices selling to a competitor or a cash-rich company. Private equity has become a dirty phrase in a prospectus, so the houses’ prices as buyers (since they want an exit route) are cut accordingly. Meanwhile, after some high-profile failures, many investors just won’t look at a new issue. The praetorian guard of banks surrounding the flotation of Glencore prevented proper outside analysis, with painful consequences for the buyers.
Yet this is only half the story. Direct Line floated at 175p in October and the shares cost 224p now. Those in Fusionex, a Malaysian software company, have risen from 150p to 248p since listing in December. Even Rangers Football Club shares somehow command a premium to their issue price.
Still, the new issue mechanism cannot be said to be in full working order, hence the pressure for reform from the likes of Legal & General this week. Its wishlist includes linking fees to post-flotation performance and a mechanism to avoid too many analysts being muzzled.
L&G has a point, but what it really wants is a bargain – a stock that turns out to be worth more than it cost. Well, don’t we all. Better analysis would help, especially in warning when to stay away, but the key is a rising market. The sight of others making money concentrates minds wonderfully, while higher prices for stocks shift the value balance for vendors away from trade sales or private equity. If shares continue rising, expect many more new issues this year, with or without reforms.
Mark my words
Sometime before July, Mark Carney should have a word with Jil Matheson, Britain’s National Statistician, who sensibly decided to put pragmatism before purity and not fiddle with the Retail Prices Index. Mr Carney, the next governor of the Bank of England, has been musing about the inflation target (measured by the statistically smarter, but less useful, Consumer Prices Index) for the Bank’s Monetary Policy Committee.
The wonks are urging him to press for Nominal Gross Domestic Product targeting instead. As Ms Matheson would doubtless tell him: don’t do it. The MPC has found it hard enough to hit a clear, concurrent and unambiguous target. If he is tempted by NGDP, he should nip down to the pub on arrival from Canada and try explaining it. Early in the evening would be best.
Measuring GDP is as much art as science. There are three ways of doing it, the estimates get revised (sometimes dramatically) and by the time there is rough agreement on the number, it is little use for policy making. Economist Scott Sumner of Bentley College, Boston, has done his best to justify targeting GDP, but his argument is too technical for me. Sometime in his tenure, Mr Carney is likely to have to raise interest rates. Just let him try to explain that NGDPLT* is to blame and see where that gets him.
The 12⅝ per cent subordinated, unsecured, irredeemable Northern Rock notes were not the bargain they looked when I paid £80 per £100 of face value in March 2008. After the government rescue they crumbled to £16, as liabilities of NRAM, the bad bank. An offer to buy them in was accompanied by a statement so gloomy that canny holders smelt a rat. We rejected it and the price limped up to the low 40s – until last week, when it jumped to £67.
NRAM is not quite the basket-case it once seemed. It actually declares a profit, although the accounts are an extreme example of the art. The market is thin, the spread wide, but the interest payments are (in theory) accumulating at 12⅝ per cent a year. I certainly Can’t Recommend A Purchase, but the recovery in this and other detritus from the banking crash does show that patience really is a virtue.
*Nominal Gross Domestic Product on a Level Target