IPOs in Australia
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.