Catching the waves on Europe's rolling IPO market

13/09/2018

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​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 growth-seeking 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.
 
Yoox.com (YOOX IM)
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. Yoox.com 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 Net-A-Porter.com. In June this year, the parent of Net-A-Porter, Richemont, bought 95% of the available shares in Yoox Net-A-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.
 
Stabilus (STM)
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.
 
Finecobank
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 noiseand 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.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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TR European Growth Trust PLC

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