Many industry experts predicted that increased IPO activity would feature prominently throughout 2010.

IPO levels have indeed increased with some high profile companies – such as New Look and Travelport – trying to come to the market recently in an attempt to raise funds.

However, many have had to withdraw once the market made it clear it was not prepared to pay the valuations being asked for what appeared to be an exercise in paying down debt in over-leveraged private equity situations.

Whilst it would seem that the market is not quite ready for IPOs in the large cap space, Catherine Stanley, F&C’s Director, UK Small-Cap, believes the story is very different at the smaller end of the market.

Small is beautiful
“There are some quite interesting companies at the small-cap and tail end of mid-cap – around £25m-£400m – which are looking to come to the market and are more likely to have successful flotations.

“These are largely companies which are not private equity-backed or over-leveraged, but rather have sensible balance sheets and cashflow. What also sets them apart from the high profile IPOs is that they are likely to have more realistic pricing expectations,” Stanley says.

One such example was the recent IPO from Digital Barriers, a £25m market cap new venture from the team behind Detica Group plc.

Previously a supportive shareholder in Detica, Stanley seized the opportunity to invest in a start-up company from a quality management team with a proven track record.

Opening doors
Should the IPOs for these smaller companies be successful, Stanley believes that this could open the door for similar companies to come to the market and signal the return of healthier, more normal market conditions.

David Clark, small cap manager with Ignis Asset Management is another who sees good prospects for IPOs in the small cap space.

He has moved into the IPO market in response to what he sees as attractive launch valuations
“IPO pricing has been much more realistic in small caps than in large caps and private equity is much less involved,” he argues.

Clark has recently invested in Super Group and CSF Group and he hopes to take an allocaton in Metric Property Investments’ IPO.

Good value
To validate his point about valuations, Clark says: “Super Group was priced at a p/e of eight and we expect earnings growth of around 15%-18%.
With regard to sector preferences, Clark leans towards healthcare, natural resources/minerals and support services as a rule he is steering clear of consumer orientated names.