Luke Johnson: Expect a booming IPO market in 2014

This year will surely be the best one for British business since 2007, argues serial entrepreneur Luke Johnson.

by Luke Johnson
Last Updated: 31 Jan 2014

It feels to me that January started with a bang and my diary for the coming weeks is already full of meetings about fresh opportunities. I expect to be very busy making new investments and enhancing what we already own.

Almost everyone I meet is generally more optimistic, keen to invest, ready to hire and take advantage of the improved sentiment. The remarkable recovery in confidence is to be celebrated: conditions don't get much better than this.

Yet, many of the usual commentators, economists and professional pessimists are pointing out the negatives, shortcomings and dangers: too much debt, unbalanced growth, rising inequality, the north/south divide and so forth.

These observations are not wholly wrong - but they are hardly news. Despite the gloom of the so-called experts, entrepreneurs and wealth creators are busy charging ahead, fuelled by animal spirits. The risk-takers can see that the cycle has decisively turned.

The stock market is symbolic of changed perspectives. Not only have indices roared ahead in the past year - especially for smaller-capitalisation shares - but enthusiasm for new issues has revived in a major way. I predict this year will be the most active IPO market for at least a decade.

I'm delighted at this turn of events: after all, the purpose of a public equity exchange is the provision of capital for industry, which in turn creates jobs, tax and so forth. The City has rediscovered its mission in society.

In fact, I can recall that when I was a stockbroking analyst in the early 1980s, easily the most exciting and enjoyable aspect of the job was floating new companies, rather than writing about the same old quoted stalwarts.

This generation of brokers will have to learn how to manage the process properly: giving owners a fair price for their stock but not overhyping companies that then inevitably disappoint. The simple motto with public companies never changes: underpromise and overdeliver.

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Recently at the Centre for Entrepreneurs, the think-tank I co-founded in October, we were discussing the perennial problem of why British firms do not scale up more, with too many company founders bailing out early rather than going on to create world-beaters.

I have always believed this is a cultural matter, rather than a challenge that government intervention could solve. Perhaps the definitive book on the issue is Martin Wiener's English Culture and the Decline of the Industrial Spirit, 1850-1980.

I started my business career in 1981, the year the book was published, and I believe attitudes have improved dramatically since then. Nowadays, many of the brightest and best want to start their own company and emulate the success of empire builders like Branson and Dyson.

However, the central argument of the book - that once they get rich, industrialists in England adopt aristocratic values and want to become gentlemen, not wealth creators - still holds some truth.

Perhaps we cling on to the past too much and therefore partly reject the potential of technology and the future. Nimbyism is possibly more common in Britain than anywhere else, and it naturally militates against growth.

In the 21st century, the ability of a nation to generate firms and products that sell internationally is more important than ever. By many measures, Britain is an innovative and enterprising nation.

But if all our finest entrepreneurs cash out at the first opportunity in order to buy a country mansion and go shooting, our economy will suffer the consequences. We need entrepreneurs with staying power.

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It's curious how the biggest deals can sometimes offer the best value. Take the automotive industry. In 2008, Tata Motors bought Jaguar Land Rover (JLR) from Ford Motor Company for around £1.4bn.

The business now makes annual profits of at least £1.5bn and has done for at least three years. It has been a fabulous turnaround, and sales have risen substantially under the ownership of the Indians. They have also invested heavily in the business.

But by any measure the acquisition was a stunning coup. And it has been great news for Britain too: the new owner continued to recruit new staff throughout the recession, and JLR's global prospects are perhaps the best in its history.

Meanwhile, Fiat has just agreed to buy the 41% balance of Chrysler it does not already own. The net price of the US car maker to the Italians will end up at around $3.5bn. Chrysler itself is now the principal profit engine of the entire Fiat automotive group.

It is likely to have generated at least $1.5bn in profits in 2013. Once more, it has proved an amazing comeback: the business was bankrupt a few years ago. And, once more, a foreign purchaser has picked up an iconic, multibillion dollar business for an astonishingly low profit multiple.

Some years ago, Renault pulled off the same trick by buying 44% of Nissan in Japan and dramatically improving its fortunes. In all three cases, an ailing car manufacturer was bought by an overseas trade player with its own challenges.

And in every case - Tata Motors, Fiat and Renault - the purchasing company transformed its own fortunes: for example, Renault's sales are less than half those of Nissan.

Sometimes, it takes an outsider with real courage to see a true bargain.

- Luke Johnson is chairman of Risk Capital Partners.

- Follow him on Twitter: @LukeJohnsonRCP.

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