Headline figures suggest this year’s Initial Public Offering (IPO) market has been solid rather than spectacular. About 80 companies have listed on the Australian Securities Exchange so far this year, raising a combined $8.2 billion.
By year’s end, float volumes will be broadly on par with 2015 (85 listings) and capital raised will be just ahead ($7.02 billion).
Look beneath the figures and the 2016 float market is arguably one of the best in the past five years, although nowhere near the bumper 2014 IPO market when $16.7 billion was raised.
Nevertheless, there is much to like about this year’s IPO market. First, Australia’s equity issuance was much stronger in relative terms compared with United States, European and Japanese markets. Those markets suffered big falls in IPO capital raised, year-on-year. IPO capital raised in the US in 2016, for example, almost halved over 2015.
Second, the Australian IPO market held up reasonably well, despite the absence of a blockbuster government privatisation or household-name float. The 2014 Medibank IPO alone raised $5.6 billion and helped bring retail investors back to the float market.
Third, this 2016 IPO market made a strong comeback after a terrible first quarter when investors fretted about global growth and market volatility rose. Volatility is the natural enemy of the IPO market and there was plenty of it as the market digested Britain’s decision to exit the European Union and Donald Trump’s surprise US election win.
Fourth, there were fewer private equity floats this year compared with 2015. Private equity firms brought several floats to market in 2013 and 2014 – some good, some bad – and were a source of significant IPO activity. Private equity now seems to be reinvesting capital after a round of investment exits earlier in the latest IPO cycle.
Fifth, there was strong demand for information technology and financial technology (fintech) floats. About one in four IPOs in 2016 was tech-related by my count – a remarkable trend as more technology companies, particularly earlier-stage ones, see ASX as a tech-supportive exchange.
Finally, IPOs were in healthy demand by retail investors, say investment bankers I spoke to about this year’s IPO market. Retail investors, it seems, were prepared to invest in small- and mid-cap companies that were not well known before their listing.
I suspect 2017 could be a much stronger year for IPO activity. Investment bankers, of course, always talk up the float market’s prospects: every year looks like a boom. But I like the prospects for next year’s float market as the IPO pipeline builds.
There’s already talk of a few billion-dollar energy floats, some possible large divestments and even State government capital raisings. Who knows if they will come off, but it would only take one or two billion-dollar IPOs to give the market a boost.
IPO standouts from 2016
A handful of IPOs caught my eye this year. The first was National Australia Bank spin-off, CYBG, which raised $877 million at listing in February at a $3.99 issue price. The British bank, covered positively several times in 2016 in this column, rallied as high as $5.86 before easing to $4.70. CYBG has good prospects as a long-term turnaround play.
Chart 1: CBYG PlcSource: The Bull
Reliance Worldwide Corp, the year’s largest float by capital raised, was another standout and arguably the one that opened the 2016 IPO window for other companies. The family owned, US-focussed plumbing group raised $918 million and listed on ASX in April.
Reliance attracted strong investor interest, despite a low profile, and its $2.50 issued shares rallied to $3.01. It is a stock to watch as the US housing sector continues to strengthen.
Chart 2: Reliance WorldwideSource: The Bull
Wisetech Global, the year’s largest technology float, also performed well. The software group raised $170 million and listed on ASX in April at $3.35 a share. Wisetech has rallied to $5.75 and remains one the more promising ASX-listed tech stocks.
Source: The Bull
Fintech minnow Afterpay Holdings attracted attention. After raising $25 million at $1 a share and listing in May 2016, it soared to $2.51. The float’s success reinforced market interest in fintech and greater willingness to invest in early-stage companies.
Chart 4: Afterpay
Listed investment company (LIC) floats were popular in 2016, continuing the trend from a year earlier. WAM Leaders, from the high-performing Wilson Asset Management, was the best of the bunch, raising $394 million and listing on ASX in May 2016.
The large-cap-focused LIC traded a few cents above its $1.10 issue price as this column was written, and earlier this year hit $1.18. LIC floats usually trade at a discount to their issue price and pre-tax net tangible assets (NTA) in their first year after listing, as the market digests the float’s offer costs and any options issuance.
Chart 5: WAM LeadersSource: The Bull
Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider the appropriateness of the information, with regard to your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at December 7 2016.