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IPOs in Australia

Published 24-FEB-2017 10:18 A.M.

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2 minute read

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Initial public offerings (IPOs) are the mechanism by which the stock of a company is first offered to the general public. Their launch coincides with the release of the company’s shares on a public exchange, such as the ASX in Australia. The offering gives the company access to additional capital, as well as giving its existing equity holders the ability to liquidate some of their position in a public market writes Sam Green.

There is evidence to suggest that consistently investing in equity IPOs could be lucrative.

However it should be noted that IPOs are very high risk and this article is not intended as investment advice. Please seek professional financial advice before making any investment decision in any IPO or the companies mentioned in this article.

Research conducted by Stein, Roe & Fonham Inc (and cited in many academic articles) suggests that IPOs are under-priced by roughly 16% on average, in an effort to attract investors. Whilst this may not hold true for all IPOs, it is definitely worth bearing in mind when considering investing in an IPO. In fact, the average first day return for an Australian IPO in 2016 was 16.6%, broadly correlating with historical average under-pricing estimates.

The best performance came at the small end of the market, with new floats issuing less than $50 Million outperforming the larger floats by more than 17% at year-end.

A lot has been written in the financial press recently, speculating that the era of IPO outperformance may be at an end. However, the statistics paint a different picture; IPOs outperformed the ASX200 index by 18% and returned an average of 25% at year-end in 2016. Even better than 21.7% end of year return for 2015 IPOs.

Historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may not be replicated. Those considering this stock should seek independent financial advice.

Much of the negative financial press regarding IPOs has focused on the failings of Private Equity (P.E.) backed IPOs, such as Dick Smith (which collapsed completely), and Spotless Holdings (who plunged following earnings downgrades).

Typically, Private Equity firms invest as leveraged buyouts or venture capital, often with a view of exiting the investment through a public issue. It is unsurprising therefore, that IPOs being launched by Private Equity firms may not enjoy the same under-pricing typical of non-P.E. IPOs; you should therefore be careful when considering a private equity backed IPO.

A recent report from Herbet Smith Freehills showed strong IPO activity in Australia last year, with 2016 hosting 96 new ASX listings (approximately 13% more than 2015), which raised more than $8 billion in capital between them. It was a big year for information technology (IT) listings, which represented 25 percent of the 2016 IPO market in Australia.

2017 looks set to be another bumper year for capital raising in Australia, with more than 45 Australian IPOs already in the pipeline.



General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

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S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

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The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

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