Initial Public Offering (IPO)

An Initial public offering or IPO are opportunities to invest in companies listing on the exchange for the first time. IPOs can offer opportunity for growth, yield and speculation. We actively perform our own due diligence on upcoming IPOs and can provide access to the latest offerings.

Many investors have had access to a long history of successful IPO listings going back many decades. Early investors could have bought into CBA at a mere $5.41 in 1991 and collected or reinvested many dividends along the way.

In recent years nearly 60% of Australian IPOs finished the year higher than their listing price, sparking interest for speculators, traders and investors.

Not all IPO’s have been successful and below we will discuss a few considerations for investors who are looking at investing in IPOs.

What is an IPO?

An Initial Public Offering (IPO) is the first time shares are issued to the public.

Prior to shares being issued publicly, a company is considered to be private. Private companies are often owned by the company founders, with investment from private sources, angel investors or venture capitalists. In the case of some of Australia’s largest IPOs, they were government owned companies which were sold to the public.

Why companies list on the ASX?

The main reason companies list on the ASX is to raise capital from the public to fund growth, research or to purchase inventory and equipment. Public companies are generally able to achieve a lower cost of capital and can often attract higher calibre management and staff. Private companies generally have to raise capital through debt or private investment.

Public companies are required to disclose financial information and are subject to tighter rules and regulations which leads to more transparency for investors.

What to consider when investing in an initial public offering or IPO.

An IPO or initial public offering may present an opportunity for high growth, out-performance or income. Investors can perform their own due diligence by analysing the company prospectus, aiming to assess the associated risks and expected outcomes when investing in a particular initial public offering. It is important to understant the nature and risk profile of the IPO as some investments might be speculative while others might be established businesses with a long earnings history.

Read the Prospectus

As the name suggests the prospectus gives potential investors an insight into the company’s potential profitability and risks.

IPOs in many instances are offered on the back of strong market conditions.

As such investors can get caught up in hype surrounding an IPO and decide to invest prior to analysing the company’s true potential.

Investors need to get a fundamental understanding of the business and how it plans to use the additional capital to grow.

Getting an Allocation

It’s often said you can’t get access to the best IPOs, while the duds have ample supply to go around. Often times specific brokers are the best way to access floats ahead of the masses. We have spent many years building relationships with investor networks and investing in IPO’s. Trading Equities monitors all up-coming IPOs, searching for the next best initial public offering.

What are the funds going to be used for?

The goal of an IPO is usually to raise capital to fuel future growth. Some capital raisings for smaller floats may go towards an investment which is speculative in nature. This could be a mining company that is still in the exploration stage or a biotech company that is raising funds for further trials. IPO’s of this nature can be speculative and will therefore often present an investor with a high risk/reward profile.

Examine the Executive Team

Analysing a company’s financials can be just as important as analysing the past achievements and calibre of the senior executives. Potential investors can aim to identify if the management team has the expertise and connections required to execute the company goals.

Not all IPOs are created equal

There’s a significant difference between Medibank Private and a junior minor looking to raise a few million dollars. As such expectations need to be different. Investors may allocate a smaller portion of their portfolio to unproven companies, compared to the well established privatisations that we have become accustomed to in Australia. The asset allocation or weigthing across IPO’s will always depend on the invididual investors risk appetite.

Always read the prospectus and where possible consult with a licenced investment professional.

Executive Compensation

It’s important to not only assess the calibre of the management of a company, but also how much they themselves have at stake. Questions raised might include how the senior management are being compensated and how much of that is linked to performance. Similarly it is worth examining how much of the company the senior management own themselves. Research suggests that founder led companies often outperform those without any strong link.

 

Is Private Equity Involved?

If the IPO is from a private equity firm, investors may want to discover how much of the company they are selling and what their role will be in managing the business post the listing.

Over subscribed IPO’s

 

Many investors might not get the allocation they were hoping for when an offer is over subscribed. An over subscribed offering will be scaled back where investors recieve a percentage of the amount applied for.

 

Post listing the investor will have the opportunity to increase their holding and depening on performance this could be at a premium or discount to the IPO.

Some investors may read a prospectus and like the investment idea however prefer to wait until the secondary market allowing them to further assertain and investigate the demand for the stock or wait for further updates.

IPO past performance.

Traditionally IPOs have presented quality investment opportunities for investors with long term growth investment profiles. The ASX has also had it’s fair share of speculative IPO’s which have quadruppled in price and others which have under-performed. CBA is a great example of successful listing. The long term quarterly chart is below.

All IPOs need to be studied carefully and investors need to fundamentally understand the company and the expecations of the listing. This relates to  an investors risk tolerance and understanding of whether they are investing in a company with a history of earnings or something with a specualtive nature like an exploration or early stage biotech company. 

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