Tech and growth have not been synonymous with the UK market but the latest wave of initial public offerings (IPOs) indicate that it is broadening into this space.
The UK market has predominantly been categorised as cyclical and value as financials, health care, consumer staples and industrials collectively make up around 60% of the FTSE 100. Information and technology makes up less than 2%, a complete polarisation to the S&P 500, its American cousin, which has led the way in markets over the past decade.
In the US, information technology accounts for almost 28% of the index, with the likes of Facebook, Amazon, Apple, Netflix and Google parent company Alphabet (FAANG) dominating the market, value sectors such as energy, materials and utilities all account for less than 3% each.
S&P 500 vs FTSE 100 over 10yrs
Source: FE Analytics
However, this could now be shifting as the UK has seen a rise in growth, tech and internet IPOs this year. In the first quarter (Q1) of 2021 there were 25 IPOs on the London Stock Exchange (LSE): 10 of these were high-growth tech and consumer internet companies.
Murray Roos, group head of capital markets for the London Stock Exchange Group, said the momentum for these types of companies floating on the UK market had already begun in 2020, when high-growth tech and consumer internet companies accounted for 40% of the capital raised on London’s markets.
This has extended to 2021, with the Danish online review platform Trustpilot launching in the first quarter of 2021. On its opening day Trustpilot’s shares rose by 16% at the peak and it has since risen 45%.
Trustpilot share price since launch
Source: FE Analytics
Another successful IPO was DarkTrace, a cyber security firm. Upon listing, the company was valued at £1.7bn, but its shares jumped 44% on its first day and has since returned 77.3%.
DarkTrace share price since launch
Source: FE Analytics
The success of these types of companies signals a broadening out of the UK market away from its traditional cyclical biases.
Dan Harlow, co-manager of the AXA Framlington UK Smaller Companies fund with FE fundinfo Alpha Manager Chris St John, said it also indicated the UK investor appetite for these types of companies.
He said the success of these two IPOs was encouraging for the future of the UK market as it would be able to attract more “stronger, growth-oriented names” down the line.
FE fundinfo Alpha Manager Richard Power, agreed. He said that it was not the case that the UK has never developed, or been interested in, creating growth companies, but it has been poor at retaining that development.
Power runs the FE fundinfo Five Crown rated FP Octopus UK Micro Cap Growth, and pays close attention to the IPO and Alternative Investment Market (AIM).
He said the UK has been a “hub for innovation for generations” but that it has failed to scale businesses successfully, with many being bought out by overseas investors.
Julian Cane, manager of the BMO Capital & Income trust, said there were two other reasons why the UK has been reluctant to embrace tech, growth names.
One was that “stuffy” managers have had a complete focus on dividends, an element of investing the UK is known for but not growth companies which reinvest their capital and do not have the “distraction of paying dividends”.
Second was the UK regulators being unwilling to back companies without a long, established track record.
Cane said that although the IPOs coming through was a positive thing and should hopefully mean the UK market “broadens out” there was a justified level of caution, especially from regulators.
Although there have been some “amazing success” Cane said regulators and investors should be wary of falling into new companies which promise to do something exciting in the future but don’t have their present strategy sorted out. This would be “quite a dangerous type of vehicle to be quoted,” Cane said.
Still, the overall reaction from managers was positive. Power said: “It’s great to see some of the more recent tech successes come to the London's stock market.”
Ideally they’ll remain in the UK and scale up, he added, something that would shift the shape of the FTSE.
One company he said could be a capable of this was Auction Technology Group, which provides the technology for carrying out online auctions.
Auction Technology Group share price since launch
Source: FE Analytics
Since it IPOed in February this year Power said the company had “really scaled as a business” and had some successful acquisitions in the US. During that time it’s made a total return of 71.8%.