Deliveroo failed to deliver, but don’t throw out the calzone with the cardboard
Despite the IPO debacle, retail investors should not ignore future listings
Spare a thought for the Deliveroo customers who went for the company’s latest special offer — the chance to invest in its IPO. They were left wishing they’d gone for a discount pizza instead.
This week’s disastrous flotation, which saw the shares plunge 31 per cent at the opening, has left around 70,000 retail investors licking their financial wounds instead of tucking into a Napoli with extra anchovies (full disclosure: personal favourite).
The failure of London’s most widely-publicised offering since metals group Glencore joined the market in 2011 will send shockwaves through the ranks of savers considering backing some of the other high-profile IPOs expected in London this year.
And it will reinforce the arguments of those City professionals who claim retail savers are best kept away from IPOs because they’re too risky.
But, stretching the metaphor to breaking point, let’s not throw out the calzone with the cardboard. It would be wrong for either investors or policymakers to decide their approach to future flotations on the basis of this mess.
Here’s why: Deliveroo is a debacle largely of its own making. It was priced high. Even at the final reduced offer price of 390p, the company aimed for a multiple of 6.2 times last year’s revenues, compared with listed rival Just Eat Takeaway on 5.7 times. Founder Will Shu and his advisers were looking for a premium when a discount would have been prudent to get the sale away and leave investors a few crumbs on the table.
Deliveroo came to market with the tech wave it is riding losing its force. Well aware of the sell-off in the US, investors on this side of the Atlantic are also increasingly picky. The Hut Group, the highly regarded website operator, is down around 20 per cent this year. So, more to the point, is Just Eat.
Deliveroo has also been hit by ride-hailer Uber’s decision to give its drivers limited employee rights after the UK Supreme Court ruled they couldn’t be treated as self-employed. The move, which will raise costs, rattled other companies in the gig economy, not least Deliveroo.
Finally, influential fund managers took umbrage at Deliveroo’s control structure. Anticipating a likely government move to relax UK governance rules to attract more tech entrepreneurs, the company established a dual-class share structure under which Shu has 58 per cent of the vote but only 6.3 per cent of the financial capital.
Deliveroo can legitimately say it’s only passing through a door opened by chancellor Rishi Sunak. He has welcomed a listings review by Lord Jonathan Hill which backs greater flexibility, including ending some restrictions on dual-share companies.
But this is like a chef boasting that she’s going to satisfy the health and safety inspectors when the customers are boycotting the takeaway. Deliveroo’s advisers should have seen this coming.
To add insult to injury, retail investors who bought up to £1,000 worth of shares each in Deliveroo’s customer scheme cannot sell until next Wednesday. So they’ve plenty of time to rue their misfortune without being able to do anything about it.
But none of this means retail investors should stay clear of other IPOs. The idea of getting into a stock at the start has magic about it. It’s the closest the average saver can get to backing an entrepreneur early; it carries the hope, however remote, of finding the next Apple or Amazon. It’s an emotional appeal, but one worth nurturing at a time when capitalism is under fire and business is often a dirty word.
Of course, IPOs don’t always deliver. In the four years to 2020, IPO stocks on the London main market brought average returns in the first month of trading of 5.2 per cent. That easily beat the FTSE 100 index, which fell 9.6 per cent. But given the volatility often involved in IPOs, as Deliveroo has highlighted, it’s hardly earth shattering. London’s second-tier Aim, which is more volatile than the main market, rose 42 per cent over 2017-20.
The key, as always, is to be comfortable with the risk. IPOs are less predictable than stocks in general, which in turn are riskier than funds. Savers should not let the thrill of the chase blind them to the financial realities, nor bet too much money on one unpredictable delivery.
Private investors rightly complain about the lack of access to IPOs. Companies don’t often set aside stock for the retail market, because it’s easier to focus on the big City funds.
Writing to the Treasury in February, the chief executives of three retail platforms — Hargreaves Lansdown, AJ Bell and Interactive Investor — said that retail investors had been cut out of 93 per cent of London’s IPOs in the three years to October 2020.
“Retail shareholder rights are almost completely ignored when it comes to the vast majority of IPOs, which largely take place between City institutions behind closed doors,” they said.
The Treasury tells me it is preparing its response to the Hill report. We shouldn’t expect radical change. Hill focuses on making the post-Brexit London market more competitive internationally and not on promoting savers’ rights, though he does talk of trying to “empower retail investors”.
But why wait for the government? Bankers are missing a trick. They can do much more under existing rules. London’s financial markets are hardly popular with the general public; they need support, especially when new rules are being written for the post-Brexit economy.
If financiers cannot engage with investors — hardly society’s most anti-capitalist element — with whom can they engage? If they don’t try harder, they’ll be producing pizzas not prospectuses.