The Australian IPO market went into frenzy mode late last year with 21 new offerings in December.  This is the highest number of new offerings in a single month since December 2010, as unlisted companies took advantage of the momentum in equity markets to attract new investors.  Investment banks have indicated a possible 30 new listings in the early part of 2014 from private equity sellers alone. Assuming stable equity markets we are likely to see the frenzy resume later this month.

The accompanying table shows the performance to date of Australia’s December IPOs with offer sizes over $10m. While the average return of 5.1% is great the large variance in individual returns highlights the need to be selective when investing in new issues.

December Initial Public Offerings over $10m

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Investing in IPOs is more risky than buying listed shares as less information is available on new listings.  There are a few rules of thumb the investor can follow to reduce the risk of buying the next failure:

  1. Concentrate on companies raising new capital – if a business is not raising new equity the existing owners are selling shares which may be because the Company has a poor outlook.   Every owner will say they are selling to diversify, but the owner of a great business with a fantastic outlook will not want to diversify!
  2. Be wary of private equity floats – private equity companies can be very good at buying a good business, cutting costs, scraping the investments for future growth, stuffing it full of debt and selling at a fat profit before the lack of new investment results in a slump in earnings.  There have been some disastrous private equity floats in Australia in recent times, analyse these floats with a big cup of skepticism.
  3. Don’t buy because everyone else is – every IPO is “many times oversubscribed” according to the promoters.  It can be tempting to invest in the IPO of a business that has a poor long term outlook on the expectation of making mouth watering short term returns because there is “huge demand”.  If this apparent demand fails to appear after listing, the stock will fall and you will be left wondering where all the buyers went.  However, if the Company is fundamentally sound, you get to buy more shares below the issue price.

Vehicle leasing and fleet management Company SG Fleet is the next off the block with an expected listing date early March.

William Curtayne

Portfolio Manager

Disclosure of interest:  As an active manager Milford looks to invest in IPOs where appropriate and has invested on behalf of clients into six of the companies listed in the table above.