AJ Bell and FinnCap IPOs

Here are some comments on the IPOs of AJ Bell and FinnCap which are open to private investors  ̶  the former to any of their clients who wish to put in £1,000 or more. The latter can be purchased from the PrimaryBid platform.

Bearing in mind that I have previously said that you should never invest in IPOs (see my comment on Aston Martin which was certainly right as the shares are now down over 20% since IPO here: https://roliscon.blog/2018/09/09/the-market-dunedin-and-standard-life-smaller-companies-merger-and-aston-martin-ipo/ ), these comments will be reserved in nature. Even the very successful launch of Smithson Investment Trust which went to an initial premium seems to have retraced its steps. But there are exceptions.

One reason why you might wish to buy AJ Bell shares, or at the very least read their prospectus, is if you are a client who uses their Youinvest platform. As we saw with past debacles in stockbrokers, such as the recent events at Beaufort, because investors on such platforms are in nominee accounts it’s definitely worth keeping an eye on their accounts. Being a shareholder means you can go along to their AGMs and ask questions. Investors will be pleased to hear that AJ Bell claim to have a “strong regulatory capital position which is supported by a high Pillar I coverage in excess of approximately 440%”.

The company has 95,000 retail investor customers and 89,000 customers via advisors. All are execution-only clients, i.e. AJ Bell provides no advice. Their average customer account value is higher than most of their big competitors and this is probably because of their historic concentration on SIPP accounts which represent 63% by asset value of their accounts.

Founder Andy Bell is still with the company as CEO after 23 years and will remain. No very specific reasons are given for the IPO – it’s just referred to as a “natural next step”. No new capital is being raised and Andy Bell is selling 10% of his shares in the IPO, which will cut his holding to 25%, but together with related parties (a “Concert Party”) he will still control more than 30% after the IPO. Major shareholder Invesco is also selling a major proportion of their shareholding. No new money is being raised for the company.

The financials look very good in comparison with many platform operators, other than possibly Hargreaves Lansdown who are the gorilla in this market, but the shares are likely to be cheaper than theirs. Share price range will be between £1.54 and £1.66 giving a market cap of over £626 million.

Is it a good time to invest in platform operators whose profits can depend on the volume of share trading and assets under management? Certainly recent volatility might have helped but it is difficult to judge the longer-term trend. But as stockbrokers are highly regulated businesses it’s worth reading the “Risk Factors” and associated warnings in the prospectus. Market trends of an ageing population who may be tending to move their pension funds into SIPPs or have saved in ISAs has no doubt helped AJ Bell in recent years and is likely to continue to do so. This has generated compound growth in numbers of customers at AJ Bell of 24% in the last 7 years.

It’s particularly interesting to read the “asset transfer momentum” table on page 45 of the prospectus. That shows AJ Bell among the top few for transfers in, while Alliance Trust Savings is at the bottom – perhaps Alliance Trust were wise to dispose of it.

I have never heard complaints about the AJ Bell IT platform (they have a proprietary client front-end with “outsourced” software being used for the back-office work), so that bodes well for the future. Although it would be good if they made it easier for investors to vote their shares on their nominee platform which I think was promised but has not arrived.

I think this will be a popular IPO and although the market has been depressed by Brexit worries it might therefore get away easily. But you’ll have to make your own mind up whether it is good or bad value. I repeat my warning about buying IPOs in general – the sellers know more about the business and market trends than you do.

Details of the IPO can be found here: https://www.youinvest.co.uk/markets/ipo/ajbell

As regards FinnCap, they spell it as “finnCap” which rather shows their ignorance of English grammar. The business is a small company corporate broker and AIM Nomad. I hold a number of AIM companies who they act as broker for and they seem to do a competent job on the whole – at least no worse than any other AIM Nomad who operate in a market full of companies with optimistic future growth projections but frequently unrealistic ambitions and unproven management. This is no doubt a business with substantial regulatory risk.

FinnCap are merging with Cavendish Corporate Finance before the IPO. As a very people-dependent business, operating in a cyclical market sector, I am not sure these kinds of companies are ideal to be public companies. Therefore I won’t even attempt to comment on the valuation.

I repeat my warning about investing in IPOs – see above.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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