Ocado price cut highlights tough UK IPO market

Ocado, which received private equity growth capital funding in 2001 and 2002, was set to list for £1.1bn. However, the company's management team has been heavily criticised for putting such a high price tag on the business, which has yet to turn a profit.

The company has been forced to reduce its price range to 180-200p from 200-275p. The new price range values Ocado at £720-800m. Is management team have been branded ‘arrogant' by some market commentators, as the firm made a £2.7m loss last year. The firm raised just £10m from a customer share offer, well below the £50m expected, and has had to allocate a higher proportion of shares to its top level investors.

However, the private equity industry may find the story of Ocado familiar, with UK IPOs struggling in 2010 despite a general rebound in market sentiments across Europe. Many IPOs have been planned in the UK this year, including those of Newlook and Travelport, but just two private equity owned companies have floated so far in 2010. This compares with four each in the Nordic and DACH regions.

UK private equity IPO volume is still well below that seen pre-recession. According to unquote" data, IPOs have become increasingly unpopular among private equity fund managers since hitting 23 in 2005, steadily falling each year, with just two in both 2009 and 2010 to date. With the FTSE All-Share index currently at 2,703, well below its most recent peak of 3,467 seen in late 2007, UK public markets have failed to make a significant recovery, it seems. London markets have been volatile for much of the past decade, and are simply too unpredictable to make a reliable exit in many cases.

While institutional investors have secured Ocado's IPO, the firm clearly demonstrates the difficulties of entering the UK's public markets, with its share price falling 9% today despite the price cut. Management teams and private investors will need to ensure they have a solid business with good profit potential before daring to approach UK public investors.

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