Smaller initial public offerings (IPOs) easily outperformed on the ASX in 2016, and could continue to do so.
IPOs returned an average of 24.7% in 2016, more than triple the 7.5% delivered by the benchmark S&P/ASX 200 index, according to the OnMarket 2016 IPO Report released this week.
While the conventional wisdom may say “the larger the company, the safer the investment”, floats raising less than $50 million delivered the best results, returning 32.2%, while those issuing more than $50 million returned 14.7%.
The outlook for the IPO market in 2017 is bright, given the strong opening to equity markets and the large number of floats that were deferred from late 2016.
If the commodity rally continues, the number of resource-based IPOs could pick up after a few lean years. We also expect that more listed investment companies will come to market in 2017 after a strong 2016, when investors took advantage of their comparatively low cost for diversification.
Among different sectors, the OnMarket report reveals that IT floats were the best performers, with an average gain of 70% by year end. Other strong sectors were consumer staples (up 37%) and healthcare (up 24.2%).
Some surprising non-performing floats were financials, down an average 8.1% in 2016, barely ahead of energy, which fell on average 10%, the report found.
Why is it that smaller IPOs are undervalued when they float? Perhaps it is due to the paucity of institutional funds for microcaps: companies need to under-price to attract retail investors. Or perhaps it is that a higher return is needed to offset the higher risk of companies seeking growth capital.
Having said that, not all IPOs take off in a way that makes the category a “sure-fire” for investors; but it’s safe to say that there isn’t a category that is. Either way, a portfolio approach to IPO investments takes out much of the risk and is more inviting in return terms than either blue-chip equities or fixed-interest offerings.
Three BookBuilds IPOs to look for this year
Wattle Health Australia (ASX: WHA) is seeking to raise $6 million-$8 million. The company is committed to producing high- quality, 100% Australian-made food products, including dried milk and infant formula for the Australian and quickly growing Asian export markets. Minimum investment is $2000. The company holds a licence to export into the expanding Chinese market.
Lead manager Walsh & Company is issuing $150 million ASX- listed notes (URFHC) as responsible entity for the US Masters Residential Property Fund. The notes will be priced at $100 and carry an annual fixed interest rate of 7.75%, payable to investors quarterly. US Masters Residential Property Fund is currently the largest Australian-listed property trust with a primary strategy of investing in US residential property, specifically in the New York metropolitan area.
Fat Prophets Global Contrarian Fund Ltd (FPC) is raising a minimum of $33 million for a listed investment company established to provide investors with access to an actively managed global portfolio built around high-conviction ideas. Angus Geddes, co-founder of Fat Prophets, will be the lead portfolio manager. Minimum investment is $2200.
Ben Bucknell is CEO of OnMarket BookBuilds.