The two big lessons from last year’s initial public offerings were the huge difference between the best and worst performing companies and the importance of the first trading day.
The accompanying table lists the 12 NZX IPOs in 2014 ranked according to their performance compared with the overall market.
These figures are between the IPO bookbuild price setting day and January 22 and are on a capital basis only.
Vista Group, Genesis Energy, Eroad and Intueri Education were the best performers. They have all delivered absolute returns in excess of 20 per cent since their bookbuild date.
Vista has had a relative return of 55 per cent, comprising an absolute return of 64 per cent minus a market return of 9 per cent. Genesis Energy has had a relative return of 31 per cent, Eroad 17 per cent and Intueri 15 per cent.
The worst performing IPOs are IkeGPS Group with a negative relative return of 35 per cent, Gentrack Group minus 20 per cent and Scales Corporation with a negative 13 per cent return.
It is important to note that company and market returns do not include dividends.
The inclusion of dividends wouldn’t make a material difference because only Genesis Energy (6.6c), Scales Corporation (3c) and Gentrack (3.6c) have paid dividends since listing.
The 12 IPO companies have had an average return of 11 per cent since listing. Their average relative return is 4 per cent after taking into account a positive market return of 6 per cent.
But one of the more interesting features of these IPO companies was their performance on day one compared with their performance since then.
The clear message is that the first day of trading is extremely important because most of the market relative gains are made on that date.
The 12 IPOs had a positive relative return of 5 per cent on day one and a negative 1 per cent return after that.
Nine of the new listings had a positive relative return on day one whereas only five have had positive relative returns after that.
These figures clearly illustrate why there is often significant selling on listing day because many investors believe that this is the best time to realise a profit.
The Australian sharemarket has had a similar experience.
The ASX had 44 significant IPOs last year and they delivered an average relative return of 8 per cent. This was made up of 6 per cent on day one and 2 per cent since then.
The best performing Australian IPOs have been IPH, with a positive relative return of 71 per cent, Bellamy’s Australia (68 per cent) and Urbanise.com (64 per cent).
The worst performing were Winchester Energy (minus 44 per cent), PAS Group (minus 37 per cent) and BPS Technology (minus 22 per cent). BPS Technology owns Bartercard NZ.
The IPO markets in New Zealand and Australia had similar characteristics last year, namely a huge difference between the best and worst performing companies and a high percentage of the gains, on average, were made on the first day of trading.
There is a strong probability that these characteristics will continue into 2015.
The David Ross story only gets worse and worse with the release of every new report by PwC, the receiver and liquidator of Ross’ companies.
The sad story began on November 6, 2012, when PwC was appointed receiver and manager of Ross Asset Management and nine related companies.
Ross had 1720 investors with a purported $449.6 million of assets, an average of $260,000 per person. Ross was in hospital at the time and PwC reported that it “is unlikely, at least in the short term, that he will be able to provide any assistance to us”.
PwC’s first report, dated November 13, 2012, stated that these purported assets were held in Australia ($152.4 million), New Zealand ($3.8 million), Canada ($136.1 million), United States ($156.4 million) and elsewhere ($0.9 million).
However, PwC was able to find only $10.2 million of these investments. Few additional assets have been discovered since then.
The receivers revealed that Ross Group’s purported holdings in Roc Oil, Catamaran Corporation and Santos should be among the 20 largest holders of these securities but no evidence had been found of this in publicly available securities registers.
PwC also revealed that the Ross Group had cash deposits of only $59,000 when it collapsed.
In the five years before the collapse the Ross Group had received new investor contributions of $127.8 million compared with investor withdrawals of $172.0 million. This represented a net loss of $44.2 million.
In addition, management fees of $19.1 million had been paid to Ross. Therefore, the total fund loss during the 2008 to 2012 period was $63.3 million.
It is clear from these figures that some investors had suspicions regarding Ross’ activities and withdrew their funds.
These withdrawals were surprising because Ross was announcing above average investment returns year after year.
The latest PwC report, which was released last week, reveals that no further progress has been made on recovering the $449.6 million. This figure was totally fictitious.
PwC has placed Ross Asset Management (RAM) investors on notice regarding the following issues:
• That PwC may have a valid claim to recover monies withdrawn from RAM since December 2010 under the Companies Act 1993. This is on the basis that those investors have received more than they would otherwise have received in the RAM liquidation.
• That it may have a valid claim to recover monies withdrawn from RAM since 2006 under the Property Law Act 2007. This is on the basis that they form part of a fraudulent arrangement entered into by RAM. This is an incredibly complex legal situation that is causing considerable stress to investors who withdrew their funds before RAM collapsed, particularly those who have spent the proceeds or have invested in illiquid assets.
However, any attempt to claw back monies is supported by investors who remained with RAM because proceeds raised through this process will be distributed to them.
At this stage no legal action has commenced in relation to these potential clawbacks.
There is little doubt that Ross Asset Management was a massive Ponzi scheme because the investment returns were totally fictitious and withdrawals by existing investors were funded from the proceeds received from new investors.
The simple figures at the time of RAM’s collapse were: Exiting investors had contributed about $110 million and were told that they had additional investment returns of $340 million for a total of $450 million. Less than $10 million of this has been recovered.
The most surprising aspect of this debacle is that the Securities Commission seemed to have no idea what was happening at Ross Asset Management even though their offices were within easy walking distance of each other in Wellington.
The Financial Markets Authority (FMA), which has replaced the Securities Commission, is a far more efficient organisation and it is unlikely that there will be another David Ross type debacle under its watch.
However, there is still a huge onus on investors to make sure that their money is being managed according to the FMA regulations and guidelines.
David Ross is serving a sentence of 10 years and 10 months in prison for his role in the massive fraud.
His court appeal last year to reduce his minimum non-parole period of five years and five months was unsuccessful.
Disclosure of Interests: Milford Asset Management holds shares in Vista Group, Genesis Energy, Evolve Education, Metro Glass, Arvida Group, Orion Health, Serko, Gentrack and IPH on behalf of clients.