Investors in private companies often anticipate a surge in valuations when their firms go public, but this expectation can falter if market conditions are unfavorable. Businesses attempting an initial public offering (IPO) in a sluggish market are less likely to secure a fair valuation for their shares. Recognizing this, Lawrence Burns, deputy manager of the Scottish Mortgage Investment Trust, has advised several of his portfolio companies to delay their public listings in recent years.
A significant portion (26.4%) of the £11.7 billion trust is invested in private companies, including high-profile names like SpaceX, Elon Musk’s aerospace firm, and ByteDance, the owner of TikTok. Burns highlights that many of these firms are “quite large, quite profitable,” and well-known to public markets, which would naturally attract considerable attention should they go public. However, he has encouraged companies contemplating an IPO to wait for more favorable market conditions, as global markets have recently shown a reluctance to invest in newly listed companies, potentially leading to undervalued IPOs.
“We don’t want companies to IPO sooner than they should,” Burns said. “We also don’t want them to wait too long—it’s about doing what’s right for each individual case. In the past few years, we have occasionally advised companies to delay their IPOs. These are highly valuable companies, and we want them to list in a market that recognizes that value.”
Signs of a Potential IPO Revival
Despite the current dry spell for IPOs, Burns sees signs that the tide may be turning. Two of Scottish Mortgage’s private holdings have made moves to go public this year, signaling an improvement in market risk appetite. Tempus, a healthcare technology firm, successfully listed in the U.S. for $411 million (£325.4 million), while autonomous driving software company Horizon Robotics is seeking to raise $500 million on the Hong Kong stock exchange. If this trend continues, Burns anticipates a resurgence in IPO activity.
“One of the headwinds over the past few years has been the closed IPO markets, but we’re seeing early signs that the environment might be changing,” Burns noted.
UK IPO Market Still Cautious
While global markets have started to warm up to new listings, the UK remains cautious. In 2023, only £954 million was raised from 23 IPOs, a stark contrast to the $24 billion raised in the U.S. over the same period. This conservative approach may reflect a healthy level of scrutiny, according to Matt Evans, manager of Ninety One’s UK Smaller Companies fund. He argues that this rigor is necessary, as investors are looking for companies that can deliver sustained profits and growth.
However, the UK’s prolonged period of below-average IPO activity raises questions about whether investors are being overly critical. The 23 IPOs in 2023 represent a significant drop from the 74 in 2022 and an even more dramatic decline from the 126 in 2021.
Evans acknowledges this shift but suggests it reflects a change in market dynamics rather than investor pessimism. With UK equities trading at historically low levels—an average price-to-earnings (P/E) ratio of 13.5, compared to the global average of 20.3—it has become a buyer’s market. As a result, any new entrant must stand out amid a plethora of appealing opportunities.
“The market is full of solid businesses at attractive valuations, making competition for IPOs different now,” Evans explained. “It’s not about cynicism; it’s about operating in a different environment where buyers have more choices and can be more selective.”
