Catch­ing the waves on Europe’s rolling IPO mar­ket

Shares - - TALKING POINT -

Ol­lie Beck­ett, fund man­ager of TR Euro­pean Growth Trust, shares some of the Trust’s re­cent suc­cess sto­ries from Europe’s IPO mar­ket and ex­plains why in­vestors seek­ing growth might find Europe’s small and mid-cap space at­trac­tive.

AF­TER A STEL­LAR 2017, the mo­men­tum be­hind Europe’s eco­nomic growth slowed as ex­pected in 2018, but the first two quar­ters of the year saw an­other en­cour­ag­ing pe­riod of ini­tial pub­lic of­fer­ings (IPOs) that should re­as­sure growth­seek­ing in­vestors.

In the first six months of 2018, there were 162 IPOs in Europe to­tal­ing $23.7bn, ac­cord­ing to data from Bloomberg. Given our fo­cus on find­ing small and medium-sized com­pa­nies in Europe with high-growth po­ten­tial, we at TR Euro­pean Growth Trust (TRG) are ex­cited to find out which of these new list­ings will give us the op­por­tu­nity to grow our share­hold­ers’ cap­i­tal.

It’s im­por­tant to note that a pri­vate com­pany be­com­ing pub­licly traded is by no means a guar­an­tee of growth and it’s very easy to lose money in the IPO mar­ket, but there can be some hand­some re­wards when you get it right. Par­tic­i­pat­ing in Europe’s IPO mar­ket has been fruit­ful for in­vestors: be­tween 2013 and Au­gust 2018, IPOs in Europe have de­liv­ered a to­tal re­turn of 33.6% on av­er­age (since the date of list­ing).

The num­bers are good read­ing if you’re a growth-seek­ing in­vestor, but it’s im­por­tant to ask cer­tain ques­tions be­fore par­tic­i­pat­ing in an IPO be­cause it’s a very dif­fer­ent prospect to in­vest­ing in a stock that has a trad­ing his­tory and ar­chives of earn­ings data. You have to ask your­self why is the com­pany go­ing pub­lic?

There are many rea­sons why a com­pany would list on a stock ex­change, and many com­pa­nies sell shares as a means to rais­ing cap­i­tal to fund fu­ture busi­ness growth. That is a good in­cen­tive for in­vestors, but an asym­me­try of knowl­edge ex­ists be­tween the buyer and seller in an IPO be­cause the buyer of­ten doesn’t have the same level in­for­ma­tion about the com­pany as the seller, who in many cases is also the founder and/or in­volved in the day-to-day run­ning of the busi­ness.

As in­vestors, that means we must carry out ex­tra due dili­gence to equip our­selves with as much in­for­ma­tion as pos­si­ble be­fore de­cid­ing to in­vest or not. One key fac­tor is the amount of

eq­uity the seller wants to re­tain in the com­pany – a high per­cent­age is a good sign, but a low per­cent­age must raise fur­ther ques­tions about their mo­ti­va­tion to sell.

That also means we have to meet the man­age­ment team and eval­u­ate their abil­ity to grow the com­pany in a sus­tain­able way. This can be chal­leng­ing be­cause the man­age­ment team of a pri­vate com­pany can be in­ex­pe­ri­enced when it comes to speak­ing and pre­sent­ing to in­vestors, which can re­sult in mis­com­mu­ni­ca­tion. Some­times, though, the com­pany will bring more ex­pe­ri­enced tal­ent in to lead the com­pany through the floata­tion. Our job is to ex­tract as much in­for­ma­tion as pos­si­ble, such as their abil­ity to com­mu­ni­cate with the mar­ket and their day-to-day un­der­stand­ing of the busi­ness – and there is no science to this.

Europe’s IPO mar­ket has been fertile ground for TRG and be­low are three ex­am­ples of IPOs we have par­tic­i­pated in that have de­liv­ered fan­tas­tic growth for our share­hold­ers. As I said, it’s easy to get it wrong in the IPO mar­ket but if you carry out due dili­gence and ask the right ques­tions, it is pos­si­ble to find good growth com­pa­nies that will de­liver at­trac­tive re­turns over a rea­son­able hold­ing pe­riod.


In De­cem­ber 2009, Ital­ian on­line high-end fash­ion re­tailer Yoox Group listed on the Borsa Ital­iana at €4.30. The IPO raised €105m, which was sig­nif­i­cant at the time con­sid­er­ing it was the first list­ing in Italy for 18 months and the coun­try’s econ­omy was on its knees. launched in 2000 and had al­ready ex­panded into the US and Ja­pan by the time of the IPO and was poised to en­ter China. We liked their busi­ness model and their niche within the mar­ket: aim­ing to be the on­line re­tail part­ner for lead­ing fash­ion and de­sign brands, so it felt like a good in­vest­ment at the time.

The com­pany con­tin­ued to ex­pand and we held the stock right through its 2015 merger with UK on­line re­tailer In June this year, the par­ent of Net-A-Porter, Richemont, bought 95% of the avail­able shares in Yoox NetA-Porter Group (YNAP) at about €37 per share. That’s a value in­crease of about 780% and a

won­der­ful ex­am­ple of the growth op­por­tu­ni­ties in Europe.


Ger­man hy­draulics spe­cial­ist Stabilus dates back to 1934 but floated on the Frank­furt Stock Ex­change in 2014 at €23 per share. We liked the com­pany for its niche within the au­to­mo­tive in­dus­try, as well as its man­age­ment team and the com­pany’s strong global foot­print. The share price rose as high as €88 ear­lier this year and we de­cided to take prof­its. We’ve bought back into the com­pany since then be­cause the val­u­a­tion came back down on fears sur­round­ing the au­tos mar­ket, ow­ing to Trump’s trade war rhetoric.

The com­pany’s pri­mary busi­ness is the man­u­fac­tur­ing of gas spring sys­tems that you will find in cars, of­fice chairs and in­dus­trial equip­ment, for ex­am­ple; with a mar­ket share of ap­prox­i­mately 70% in the au­to­mo­tive in­dus­try. The com­pany is a global leader at what it does, but it is still a medium-sized com­pany and one we be­lieve has the ca­pac­ity to grow even fur­ther.


In­vest­ing in Ital­ian bank­ing might not sound wise, but some­times there is a di­a­mond in the rough, if you know where to look. We found that di­a­mond when FinecoBank floated on the Borsa Ital­iana in 2014 at about €4 per share. It has been around the €10 mark for most of this year and has the po­ten­tial to keep ris­ing.

Borne out of do­mes­tic bank Cap­i­talia, which was bought by UniCredit in 2007, the com­pany be­gan life as an on­line bro­ker­age plat­form but has since de­vel­oped its of­fer­ing to in­clude bank­ing and share deal­ing – all on­line. It doesn’t carry the legacy is­sues that has plagued the sec­tor and has branched out into sev­eral ju­ris­dic­tions, build­ing a di­ver­si­fied in­ter­na­tional cus­tomer base. UniCredit re­mains the ma­jor­ity share­holder and we are en­cour­aged by the par­ent com­pany’s sup­port­ing role. We think the com­pany has a very bright fu­ture hav­ing al­ready dou­bled its IPO share price value.

These ex­am­ples demon­strate the real growth op­por­tu­ni­ties on the con­ti­nent and why we en­joy in­vest­ing in smaller com­pa­nies. IPOs can be ex­cit­ing and very re­ward­ing for in­vestors with a long-term hori­zon, and the Trust has been a ben­e­fi­ciary in re­cent years. Not all IPOs will work so well but over­all they have been ben­e­fi­cial to the trust and give us ex­po­sure to the ‘new econ­omy’.

Last year was a fan­tas­tic year for the Trust over­all, with net as­set value (NAV) and share price to­tal re­turns of +54% and +75.5%, re­spec­tively. This year has seen in­vestors take prof­its but the fun­da­men­tals for the re­gion’s growth re­main in­tact and we think the fu­ture is look­ing bright.

TRG was trad­ing at a pre­mium of more than 3% in Novem­ber 2017, but you could buy the Trust at a dis­count of about 11% rel­a­tive to the NAV in Au­gust – such is the mar­ket’s sen­si­tiv­ity to me­dia noise and dis­ap­point­ing short term per­for­mance. For long-term out­per­for­mance and real to­tal re­turns, we re­main con­fi­dent that our ap­proach will con­tinue to de­liver for our share­hold­ers over the long term. was a prof­itable ad­di­tion to our port­fo­lio

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