CommSec
30 June 2021
Australian companies are listing at their fastest pace in almost 14 years, as companies rush to float amid buoyant sharemarkets. The prospect of higher valuations is propelling the trend, but what are the risks and rewards of initial public offerings (IPO) and how can you take part in a potentially lucrative aspect of the sharemarket?
COVID-19 largely shut down the economy in 2020 and the primary markets were no exception. In the first half of the year, the number of companies listing on the Australian Securities Exchange (ASX) collapsed. As sharemarkets rebounded, so too did IPOs.
According to advisory and accounting firm HLB Mann Judd, there were 74 new listings on the ASX in 2020, a 19 per cent increase on the year prior, but 84 per cent of those were jammed into the second half. Total funds raised, however, were $4.98 billion—a 28 per cent reduction on 2019, with only 3 per cent of that generated in the first half.
What's happened?
Last year’s solid second half IPO momentum has continued into 2021. At the time of writing, about 50 companies had floated on the ASX from a range of different sectors. Most have been from small cap miners and materials companies as commodity prices have rebounded considerably from COVID-19 lows, but some of the larger IPOs over the last 12 months have been from the non-bank financial and technology sectors.
Non-bank lender Pepper Money listed in May, raising about $500 million. This followed Latitude Financial (LFS) in April, which successfully listed with a market cap over $2 billion, and employment website company Airtasker (ART) in March, which floated with a market cap over $250 million. And there’s more to come, with some market participants expecting another four or five mid and large cap IPOs over the coming months, if the window remains open.
The performance of the newly listed companies has been mixed. ART gained 17 per cent in April, but has suffered over May and June, down 8.4 per cent, following weakness in other tech-focused growth stocks. LFS has seen weekly declines for most of its time on the ASX so far, while PPM has gained since its listing.
Why is it happening now?
Sharemarkets are riding high— here’s a deeper breakdown on why. The ASX 200 index reached a new high of 7,406.2 in June. This followed the All Ordinaries index record-breaking run in April, regaining its record closing high on April 14.
High share valuations are tempting companies to explore share market listing to raise capital. As the economy has rebounded from the pandemic, companies have also reported strong uplifts in earnings, accelerating plans to list. Tech companies in particular benefited from the lockdowns and remote working, boosting their customer numbers and earnings. Non-bank lenders like Latitude have also been boosted by the uptick in the housing market, as a swath of first home buyers have raced to ready their mortgage applications.
There’s also a backlog thanks to the slow start to 2020, due to the COVID-19 shutdowns. IPO activity typically increases during certain times of the year, so there’s a very distinct window of time companies can list. The season usually runs after reporting season from March to June, then slows for the end of the financial year and reporting season, and opens up again between September and December, before slowing again for the summer break.
What are the risks?
IPOs can yield excellent returns if priced fairly and the company is performing well or has good growth potential—timing also has to be right and there needs broad investor demand for the shares. If not, you could see an initial depreciation of your investment. Some newly listed companies may be less likely to issue dividend payments until they’re far more established, so an IPO is more focused on your investment increasing from the initial price which is why it’s so important that the shares head in the right direction.
Some newly listed companies might also be at a greater risk of failure simply because they’re at an earlier, less developed stage in their business cycle. There’s greater risk built into a younger company, so it’s important to conduct your research. This is not the case for all IPOs and in the past many large mature businesses have listed on the ASX and continued to grow and perform as a listed entity.
Brokers acting for the company and trying to build interest in the IPO will release a prospectus with key information, including a balance sheet, earnings information and profit or loss results. You can check out CommSec Learn for a quick refresher on how to research.
Lastly, with extra shares hitting the exchange, there’s always a risk new listings will draw extra capital from investors, creating IPO fatigue for future new issuances, particularly if other listings haven’t performed well.
How can I invest now?
To stay on top of upcoming listings, you can subscribe to receive IPO and new issues notifications. Simply navigate to Portfolio > Offers & Apply > IPO & new issues notification.
Depending on the structure of the IPO, there are some transactions which may only be available to Wholesale Investors. To access these offers you must provide CommSec with a Sophisticated Investor form, certified by your accountant confirming that you have:
- Net assets of at least $2.5 million; or
- Gross income of at least $250,000 per year for the last two financial years.
As a wholesale client, you may need to make your own evaluation of investment opportunities and without being provided disclosure documents such as a Prospectus or Product Disclosure Statement (PDS).
You can find out more about the Sophisticated Investor Program here.
