This was published 8 years ago
Initial public offerings: What investors should know about the IPO market
By Marcus Ohm
Investing in initial public offerings (IPOs) can be a good way for investors to "get in on the ground floor" with a new public company. But it can be hard to tell which IPOs are going to succeed and grow, and which will crash and burn.
Savvy investors who find the right opportunities can be rewarded. While individual performances varied, the average increase in share price across all new IPOs by the end of 2015 was 10 per cent, compared to the ASX 200 which fell 2 per cent over the year.
IPO volume was light in 2015, but it's expected to pick up pace in 2016. Credit: Perter Riches
Nonetheless, the IPO market in recent years has been particularly hard to predict as there have been several new trends emerging.
For example, in the years immediately following the global financial crisis (GFC), small companies (small caps) made up the vast majority of listings, with resources stocks dominating.
However in the past couple of years larger cap companies have started to come back into their own. In 2014, in particular, there were major listings such as Medibank Private and Healthscope Limited, which dominated the market and raised 49 per cent of all funds in that year.
There has also been an increase in the number of IPOs in the last few years, from 49 in 2013 and 70 in 2014, to 85 in 2015, offering a greater choice for investors.
In addition, last year there was greater diversity in industry sectors across new listings. The 85 companies that listed in 2015 represented 21 sectors, compared to 17 sectors in 2014, 15 in 2013 and just seven in 2012.
The leading sector in 2015 was technology, making up 20 per cent of all listings (up from 16 per cent in 2014) and raising $1.561 billion.
The 2014 year, in contrast, was dominated by healthcare and related companies, which raised $4.08 billion between them thanks largely to the Medibank Private and Healthscope listings.
For investors, the greater breadth and depth in IPOs is encouraging. Activity in the IPO market in the past year has been more evenly balanced between small and large cap companies, even with the total funds raised falling slightly. This bodes well for IPO activity over the coming year.
For instance in 2014 there were seven entities listing with a market capitalisation over $1 billion, compared to just two in 2015. In addition, there was a recovery in 2015 in the number of small cap companies undertaking an IPO, with 56 per cent of listings coming from companies with a market cap of under $100 million, compared to 43 per cent in 2014.
This more even spread of IPOs is a positive sign for the market, showing that better opportunities exist for companies of all sizes considering a public offering than has perhaps existed in previous years since the GFC. This also means there are better opportunities for investors.
However, investors still need to be cautious. For example, there was only one successful listing at the very smallest end of the market – under $10 million market cap – and it is likely that any significant improvement at this end of the IPO market is strongly linked to a sustained recovery in the resources sector.
The technology sector is one area that investors may like to keep an eye on. Following the success of this sector in 2015, seven new technology companies were in the process of listing at the start of 2016.
Some considerations for investors looking at the IPO market include:
1.Find a good broker. Quality brokerages can provide investors with opportunities to invest in the IPO market.
2.Do your research. Read the prospectus, understand the risks, not just the upside for the company, and balance your own opinion with those of professional advisers.
3.Choose the right vehicle. It can be difficult for investors to access some IPOs. Companies such as OnMarket BookBuilds allow individual investors to access research and participate in IPOs via a website or app.
Marcus Ohm is a partner with accountants and business and financial advisers HLB Mann Judd Perth.