A bitter aftertaste? The failed Deliveroo IPO could prevent growth shares from listing in London

The UK’s IPO market had a very buoyant second half of the year in 2020 as investor sentiment recovered from historic lows, with 13 companies floating onto the AIM market compared to ten IPOs that launched over the same time frame in 2019.

The AIM All-Share index also significantly outperformed the FTSE 100 over 2020, returning 21.8% compared to its flailing blue-chip counterpart’s loss of 11.6%.

Deliveroo IPO falls nearly a third as investors succumb to ‘anxiety’

The picture seems more muted this year, however, with the FTSE 100 outperforming the AIM All Share by 1.3 percentage points with a total return of 5%, according to data from FE fundinfo.

Deliveroo has been the latest IPO to hit the headlines, with the highly anticipated flotation snubbed by asset management giants including Aviva, Aberdeen Standard and M&G in the run-up due to concerns regarding its workers’ rights and its dual-class share structure.

Upon floating onto the AIM last Wednesday (31 March), the company saw more than £2bn wiped off of its £7.6bn valuation after its share price tumbled by more than 26% during its first day of trading.

Ketan Patel, who manages EdenTree’s Responsible and Sustainable UK fund, said he chose not to invest in a business model “which has little to commend for ESG investors, where the relationship between capital and labour is so asymmetrical”.

“The rise of the ‘S’ in ESG during the pandemic has highlighted social inequity and injustice within society,” he reasoned.

“The Deliveroo business model is best characterised as a race to the bottom with employees in the main treated as disposable assets which is the very antithesis of a sustainable business model.”

Sophie Lord, executive director of strategy at Landor & Fitch, added that the backlash to Deliveroo’s IPO is a reminder that ESG investing is “more than green commitments and pledges to reach net zero”.

“The ‘S’ of ESG – societal commitment, people, inclusivity, diversity – is just as important and brands that fall foul of this are putting their own sustainability at risk,” she added.

While the company’s IPO was hotly anticipated – in part – due to the mass uptick in demand for takeaway deliveries during the pandemic, numerous studies and surveys have shown that demand for ESG-compliant portfolios has also increased significantly.

Research from Calastone published earlier this month found that 84% of all equity fund inflows globally were into ESG-specific products.

But Lee Wild, head of equity strategy at interactive investor, added that preparations for the float have “not been ideal” aside from any social or governance issues, and that there were “several clear warning signs that all was not well”.

“Firstly, the company does not make a profit, even though the pandemic provided the biggest tailwind it could hope for,” he said.

“That benefit will fade as lockdowns end and diners return to pubs and restaurants over the summer. Remember, too, that Deliveroo had to be bailed out by Amazon last year, and it continues to operate in a highly competitive market.”

Is the problem with IPOs?

In addition to several company-specific headwinds Deliveroo has faced in the run-up to its IPO, risks regarding investing into freshly-launched companies have been well documented. Research from Dimensional Fund Advisors, which studied 6,000 US IPOs from 1991 to 2018, found that on average they underperformed the broader US market by more than 2% per year.

Joshua Mahony, senior market analyst at IG, said Deliveroo’s arrival on the stockmarket has done “far more to highlight the innate risks of investing in fresh listings” than to deliver value to their 70,000 new shareholders.

Ship shape and ready to float? IPO market picks up but headwinds remain for small launches

“This listing comes at exactly the wrong time for shareholders, with rising Treasury yields bringing pressure on growth/tech stocks, and valuations based on a period of massive upheaval for the restaurant business,” he said.

“No doubt, the company has the ability to grow into its valuation over time, but the expectation that we will see poor momentum for pumped up growth stocks does not exactly fill investors with complete confidence.”

Gervais Williams, head of equities at Premier Miton, said Deliveroo’s setback is likely to deter larger growth-orientated stocks from listing in London, but that small-cap IPOs could well continue to thrive.

“I expect many more to come, and brokers tell me they have a long list of potential IPOs in the next three quarters,” he explained.

“In a way, I do not think that the UK will greatly lose out as a result, as one of the key features of the UK stockmarket universe is that it is different from the US.

“If inflationary pressures were to build, and were growth stocks to have an extended period of underperformance, then many investors would start to reallocate capital away from the US into other exchanges that were less correlated. The UK very much meets this criteria.”

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