Earlier this year, I wrote a three-page feature for a national newspaper that previewed Initial Public Offering (IPO) activity for 2017. I was unusually bullish on IPOs and suggested this year would be the best in some time. But investors need to take care in a hot IPO market.
A few days before my report, another story predicted IPO activity in 2017 would be weak. There’s nothing wrong with countervailing opinions in newspapers – different views make a market – even if all the divergent bull/bear talk confuses readers.
Anyway, I stand by my view that 2017 will be a cracker for IPOs. If anything, the year is off to a stronger start for IPOs than I envisaged. Do not expect records to be set this year, but early indications imply a good year for IPOs by volume and value.
Alinta Energy is reportedly the most advanced of the blockbuster IPOs. The private-equity-backed company could potentially raise more than $1 billion, making it one of this market’s largest floats in years. It should be well sought after, depending on price.
Wesfarmers’ possible IPO of Officeworks surprised. Selling a large retailer via IPO in a sluggish retail climate, and with Amazon on the horizon in Australia, looks like hard work. The sale could be well-timed for Wesfarmers, although possibly not for investors if more people buy stationery online via Amazon, as is the case in the United States.
Quadrant Private Equity’s Zip Industries is another doing the IPO rounds, with pre-marketing of the offer to fund managers to gauge interest. The boiling-water dispenser provider could launch a $500 million float. It looks a solid business.
Oceania Healthcare, another potential aged-care listing on ASX, is reportedly doing the marketing rounds with fund managers. The New Zealand-based aged-care operator, owned by Macquarie’s infrastructure arm, could be a tougher sell given the disappointing performance of some aged-cared IPOs.
Navis Capital’s Retail Apparel Group is another expected float. The Kuala Lumpur-based business majority owns casual-wear brands, such as Tarocash, yd, Connor, Johnny Bigg and Rockwear. It, too, looks a hard sell in a weak retail climate, but that may be reflected in the valuation.
Hotel, pub and restaurant owner Dixon Hospitality is another mooted IPO this year. Former Spotless Group CEO Bruce Dixon leads the fast-growing business, owner of several prominent entertainment venues on the East Coast.
Among larger possible floats there’s Origin Energy’s likely divestment of its upstream gas and oil businesses.
It’s not all good news for floats. The IPO of Accolade Wines, Australia’s second-largest wine business, is reportedly on hold, partly because of currency issues.
Also, Crown Resorts’ sale of a 49 per cent interest in some of its hotel and retail property assets through an IPO, announced last year, has been put on hold.
As always, much depends on the sharemarket sentiment with IPOs. A correction or pullback could stop the IPO market in its tracks, forcing some large ones to wait until later in the year or delay their launch until 2018. The second and fourth quarters are traditionally the busiest.
But the timing looks good for a rush of IPOs. Market volatility is down and aggregate valuations are just above the long-term average. Plenty of cash on the sidelines is looking for a home and fund managers appear eager for new offerings, albeit at the right price.
Global interest in IPOs is also improving. Shares in Snapchat, valued at an astonishing U$33 billion, soared 41 per cent on debut last week, then fell. Snapchat, significantly overvalued, looks like sign of an overheating US IPO market.
Investors always need extra care with IPOs because they have low or no history as listed entities. The best IPO returns are typically earlier in the cycle as private-equity firms exit investments and higher-quality companies come to market (although there have been some private-equity IPO shockers over the years).
The worst time to invest in IPOs is invariably when a rallying sharemarket encourages opportunistic vendors to lower-quality businesses for inflated prices. Speculators chase IPOs looking for quick gains and the music gets louder and louder – until it stops abruptly.
We are not there yet. Beginning in 2013/14, this IPO cycle probably has a few years to run. But as we enter the bull market’s third phase (excess), the IPO market could easily become overheated as low-quality offers seduce investor latecomers to the rally.
A spike in speculative exploration floats, just starting, and a rush of tech offers (including backdoor listings) are warning signs. Few investments destroy wealth faster than low-quality, overpriced IPOs that are deserted upon listing or soon after.
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 its appropriateness, regarding 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 March 8, 2017.