Is it worth investing in IPOs?

Will 2021 be London’s year of the IPO? After a quiet few years for the FTSE - a sharp contrast with the NASDAQ's seemingly unstoppable IPO mania - it looks like things might finally be on the turn, as the City looks forward to its biggest list of debutantes in years.

Indeed the much anticipated IPO rush - which is set to include lockdown champions Deliveroo, beer chain Brewdog, and cyber-security unicorn Darktrace - has already begun. At the end of January, the FTSE welcomed two new entrants whose names will be familiar to most investors: customised card producer Moonpig and the ever-iconic Dr Martens (the latter touted as a hot pick by The Spectator’s Sam Leith).

As is usually the case these days, both IPOs caused a flurry of excitement. By the time both had officially joined the exchange - making their stocks available to DIY investors for the first time - their shares had risen 20 per cent beyond the official IPO price. It's a reflection of the degree of pent-up demand from a market that’s been starved of fresh meat in recent years.

For the individual investor, no IPO is a sure thing. And whether Dr Martens will follow the path of recent entrants WizzAir (up 360 per cent since its 2016 debut) or Aston Martin (down 80 per cent in 28 months) remains to be seen. But a healthy spread of expected IPOs does say something about the health of a stock-market in general - and the economy of its host country.

If multi-billion pound companies are joining the FTSE, it means they’re confident that our capital markets can provide the money they need to grow. They're also making a vote of confidence in the UK economy more broadly. And coming so soon after Brexit, that’s no small thing.

Their inclusion will be good news, too, for the FTSE itself - which hasn't had an easy run of late. Even as Britain's economy has grown, our main stock-market has been consistently outperformed by its European, Asian and American competitors. The reasons are numerous; but one persistent problem has been the lack of fresh talent.

Just look at the stagnant FTSE 100. It if weren't enough that the index (which comprises the largest companies listed in London) remains dominated by energy and banking - both of which have been a big drag on portfolios for years now - just look at who else makes the cut. Are the likes of Whitbread and Pearson really the best Britain can do?

Even the smaller FTSE 250, which typically reflects the state of our domestic economy, isn’t the hotbed of energy you might hope for. Greggs, Games Workshop and Wetherspoons have done well recently, but they’re hardly new; all three went public in the 1990s.

The inevitable result of the FTSE slowdown has been a flood of money leaving London in search of better returns elsewhere. In the past five years, more than £30bn has been pulled from UK-focused investment funds, and the allocation of British companies in global funds has halved. Retail investors are it too: of the ten most popular funds purchased last year by customers of Hargreaves Lansdown, not one was FTSE-focused.

Can a run of big IPOs save the faltering FTSE? Maybe not immediately. But there’s no denying that - when you look at the list of anticipated IPOs - the City has a strong hand to play. As well as Deliveroo, there’s also fintech heavyweight Transferwise. At a combined value of £9bn, both companies will go some way to remedying the FTSE's tech shortage - one of the most common criticisms from miffed investors.

Then there's Cambridge-based cyber gurus Darktrace. With an estimated valuation of £3.5 billion, the company has long been heralded as a great British success story. Even better, it's been on a roll of late, helping various big corporations update their cybersecurity in the age of homeworking. Which partly explains why so many investors want in on it.

With vaccines gathering pace and the Brexit trade deal done, most market-watchers were already predicting a return to growth for the FTSE this year. And all being well, this flurry of IPOs should do their bit to boost that. Whatever happens, though, they suggest that the market itself is finally turning a corner. And not a moment too soon.