Hugh Sergeant, head of UK equities at SG Asset Management, is one of only two fund managers Citywire has found willing to back the PartyGaming flotation; in a exclusive report on City opinion we reveal how the online poker company could have a fight on its hands getting the IPO away even at the lower end of its indicative price range.

With just one week to go to PartyGaming’s IPO to institutional investors, fund managers are focusing their energies on getting as big a discount as possible on the stock to counter-act the possible regulatory threat from the US to its business.

Last week PartyGaming slashed its valuation by about £1 billion when it set a price range of 111p-127p, valuing it at between £4.4 billion and £5.1 billion. Our findings suggest the company will be under some pressure to cut this further.

Although based in Gibraltar, 87% of PartyGaming’s revenues – $602 million (£330 million) in 2004 – come from the US, where the Department of Justice (DoJ) deems taking bets online to be illegal.

One leading fund manager, who did not want to be named, said if he did buy PartyGaming it would be unlikely to hold it for more than a year. Even if the US regulatory threat had been exaggerated he was unconvinced the company could continue its impressive earnings growth in the face of increased competition.

Potential supporters of PartyGaming know the firm represents a calculated gamble. Hugh Sergeant, the Citywire AAA-rated UK fund manager at SG Asset Management, who is considering an investment told Citywire: ‘We are still working through our numbers on it but we are reasonably attracted to the business model. Legislation is always going to be a possibility and newsflow will ebb and flow but the risks have not increased recently in fact they have decreased in recent months.’

However, Sergeant, manager of the SG UK Growth and SG UK Special Opportunities funds, is concerned about the size of the company and the fact that it will have to appeal to a whole different set of fund managers compared with the existing, smaller online gaming operations. ‘It comes down to valuation, which is an issue for the market itself. The size means it actually requires a discount, it would be difficult for a conventional investment house to back it.’

James Thomson, manager of Rathbone Global Opportunities, had fewer doubts: ‘I am a bull on the sector and have been for the last year. The question I ask myself is how many FTSE 100 companies can produce revenue growth of 40% a year over the next four years with a 60% margin?’ On the legislative risk Thomson said: ‘Unfortunately everyone has become an armchair lawyer... the reality is very complicated. If the US legislation comes through it is a show stopper, but it is the only risk that really matters.’