The liquidity concerns that derailed star stockpicker Neil Woodford’s career this year have now bled into the market for initial public offerings, damping investor appetite for hard-to-sell securities of smaller companies.
Almost one in five listings in the UK and across Europe has been scuttled over the past six months, according to data compiled by Bloomberg. And while that’s in large part due to a valuation disconnect between buyers and sellers, smaller companies have the added burden of convincing investors of sufficient post-listing trading volumes.
Clients began pulling money from Woodford this year after his flagship UK stock fund suffered losses. Unable to return cash quickly enough because his portfolio was stuffed with unlisted and thinly traded securities, Woodford froze redemptions, leading to the collapse of his business.
The episode has left investors more wary than usual of illiquid stocks, especially hurting IPO demand for companies with market values of less than $150 million.
“There’s more focus now on liquidity than ever,” said Chris Bowman, head of UK investment banking at Berenberg. “I hope the Woodford ripple effect on liquidity is relatively short term.”
Concern about liquidity adds to the list of reasons, including cheap debt, abundant private capital and reluctant investors, that have contributed to a fall in new listings this year in Europe. Both IPO volumes and proceeds have halved from a year ago.
As a rule of thumb, investors typically cite a minimum 2 million euros ($2.2 million) of daily trading value in order to make a stock investable, said Anneka Treon, a managing director for securities at Kempen & Co. Some, such as Hermes Investment Management, have higher thresholds for new floats. Hermes portfolio manager Martin Todd said his fund only invests in IPOs that have a free float of about 1 billion euros to make sure there’s enough daily turnover.
The heightened barrier has meant that larger companies are having more success in capital markets. 
At least 11 of the 17 companies that pulled or cancelled listings in Europe this year would have had a free float of less than $1 billion. Of those that pulled listings, UK aircraft leasing firm Voyager AIR is the only one to explicitly cite the Woodford effect. The troubles at his funds had “a larger-than-expected impact on investor sentiment,” said Mark Lapidus, CEO of Amedeo, the Voyager AIR shareholder that also manages Voyager’s assets.
Small firms in the UK, particularly early-stage healthcare companies, have long counted on investment from Woodford’s funds when raising capital.
And one of his proteges also has come under scrutiny lately for owning hard-to-sell stocks. Ratings firm Morningstar Inc. last month downgraded two funds run by Mark Barnett of Invesco Ltd, Woodford’s former employer, citing concerns he had changed the focus to buy smaller companies that are less easy to sell. The firm in response shook up the leadership of its UK stock funds, appointing a manager to work alongside Barnett.
There is an increased awareness around liquidity risk from investors, clients and internal risk managers, said Shaunak Mazumder, a global equities fund manager at Legal & General Investment Management.
“Questions around fund liquidity have obviously seeped into demand for small initial public offerings,” he said. With portfolio managers being asked these questions, “how can they subscribe to smaller-sized companies with limited liquidity?”
Besides Woodford’s woes and liquidity concerns at bond investor H2O Asset Management, a late-stage economic cycle means that “asset managers want to stay nimble and are less willing to get locked in illiquid stocks,” Treon said.
Still, not all is lost for those seeking smaller floats. Small stocks offer the prospect of benchmark-beating performance, so “there’s still appetite for lower liquidity profiles,” Treon said.
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