Small-Cap IPOs

Small Fry, Big Cheese

  • Why it matters

    Why it matters

    IPOs of small and mid-sized companies hold a special allure for investors, due to their disproportionately high growth. The number of investors buying small shares has jumped sharply in the last year.

  • Facts

    Facts

    • European IPOs with a volume of €50-100 million ($57-114 million) saw price increases of more than 31 percent in the first half of this year.
    • Major European corporations have experienced below-average growth as the euro has gained value against the US dollar in recent months.
    • According to one survey, the share of fund buyers worldwide planning to invest in small shares has almost doubled over 2016, to 60 percent.
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    Audio

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Businessman Grows Wealth | Yellow Business Concept
Small caps need a lot of love, but it might be worth it in the long run. Source: Getty Images

If you want to make a big splash as a small company, Arno Fuchs is your man. His Munich consulting firm Fox Corporate Finance specializes in small and mid-sized companies. His clients include US billionaire and investing legend Warren Buffett, who has long been on the lookout for pearls in German industry.

Those pearls can be very lucrative. Just look at the results of this year’s initial public offerings, or IPOs, which is the process used when a company goes public. While big names such as Delivery Hero have garnered the headlines in Germany, Mr. Fuchs’s firm calculated that shares of smaller startups did far better on average than the IPOs of market heavyweights in the first half of this year.

“Small companies often offer more growth opportunities than large corporations,” said Stefan Weiner, head of German share issues with US investment bank JP Morgan.

“Gains of as much as 30 to 50 percent are feasible, which, of course, established companies like Siemens cannot achieve.”

Arno Fuchs, Fox Corporate Finance

Prices increased on average by more than 31 percent for IPOs with a volume of €50-100 million ($57-114 million). Their performance was more than twice that of companies with larger IPO volumes, according to the FCF’s IPO Market Monitor (see graphic below).

To be sure, these results should be taken with a grain of salt. With only about a dozen IPOs in each category, share price developments can be quite volatile. The IPOs it tracks also vary by time of year – later IPOs may have had less time to climb in value than earlier ones.

Yet, in today’s low-yield market environment, the data points to a trend that is being well received among investors. Mr. Weiner noted that many are willing to pay more for shares with a high ceiling. That’s where the newcomer dynamic has some appeal: Small caps might be risky, but they’re often better at gaining value in these early stages.

“The allure of IPOs of small or mid-sized companies lies in their disproportionately high growth. Gains of as much as 30 to 50 percent are feasible, which, of course, established companies like Siemens cannot achieve,” said Mr. Fuchs.

12 p34 Graph of the day – Course development and number of exchanges in Europe-01

To be sure, this isn’t just a European trend. According to a study by Axa Investment Managers, the share of fund buyers surveyed worldwide who plan to invest in small shares has almost doubled over 2016, to 60 percent. Of those fund buyers who are already invested in small caps, 58 percent said they intended to increase their holdings in the segment.

But there are some specific things giving small European firms an edge. With the euro gaining in value against the US dollar in recent months, Europe’s larger export-reliant companies are growing at below-average rates. “Because of domestic growth and the strong euro, we are betting on small and mid-cap stocks in the euro zone,” said Robert Greil of Munich private bank Merck Finck.

Smaller companies coming to market in Europe can also be “local champions” with high market shares in their particular industry, according to fund manager Markus Herrmann of asset management firm Lupus Alpha in Frankfurt. This, too, explains the potentially high demand for market newcomers, though Mr. Herrmann warns that investors should always examine the business model, because not every IPO is a winner.

According to FCF, there were nine IPOs in the European small cap segment in the first half of the year. Shares in Swedish helmet manufacturer Mips AB did best with a gain of just under 72 percent in the first two quarters, while initial subscribers to Oncopeptides, a pharmaceutical company specializing in cancer treatment, saw their investment rise by 62 percent. “Many young biotechnology firms on the market are acquired by larger competitors after a growth phase. This injects additional price fantasies into these types of IPOs,” said Mr. Herrmann.

Other highlights have included British household goods company UP Global Source Holdings (up 60 percent) and Italian electronics retailer Unieuro (up 48 percent). But others haven’t lived up to the hype. Restaurant chain Vapiano, with came on the market in late June at €23 a share, raising €184 million. It has stagnated so far: The share was worth €22.43 on Thursday afternoon.

There’s more in the pipeline, especially in Germany. Jost Werke, a German manufacturer of tractors and trailers, offers an opportunity to invest in mid-sized shares before the summer break, though shares are initially being offered only to large investors. Private investors will only be able to buy shares on the market.

Not that the large caps don’t matter. Indeed, there is hardly an IPO today that is unrelated to digitalization, biotechnology or Big Data. In that sense, the fortunes of these smaller companies are often tied to the fortunes of the broader industry. “The prices of small and mid-caps related to technology can rarely disengage themselves from the performance of the major tech stocks,” said Mr. Herrmann.

This can include even far-flung happenings. If shares in Apple or Microsoft show signs of weakness, investors in Europe may start selling small-cap technology stocks – whether it’s the right move or not. “We see such setbacks as good times to buy,” said Mr. Herrmann.

 

Peter Köhler covers the hedge fund and investment sector for Handelsblatt in Frankfurt. Robert Landgraf is a senior financial correspondent for Handelsblatt, also based in Frankfurt. To contact the authors: koehler@handelsblatt.com and landgraf@handelsblatt.com

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