Stock markets in Australia and globally have been shaky recently, but companies that floated on the ASX in 2015 have done well. The IPO (Initial Public Offering) scene in Australia is healthy, according to analysis in Deloitte’s 2016 IPO Report.
“Had you invested in every private equity-backed float from the start of 2013, and including some of the poorer performers, you would today be sitting on a portfolio return of 48 per cent,” says Deloitte corporate finance partner and head of transaction services Ian Turner.
“We have also analysed the performance of private equity-backed listings and confirmed that overall results are far more positive than market sentiment reflects.”
The report was produced in collaboration with M&A intelligence provider Mergermarket. In calendar 2015 there were 97 IPO listings on the ASX, up 33 percent over 2014 and 54 per cent over 2013. These companies floated with a combined market capitalisation of $17.6 billion, with capital raised in the floats exceeding $8.6 billion.
The market capitalisation figure was down by 32 per cent, mainly because the 2014 figure included Medibank Private, which was the third largest IPO globally in that year. IPOs in 2015 saw average gains of 18 per cent weighted by market capitalisation. There were also extended gains for 2014 listings, which closed the year 37 per cent above their 2014 listing price.
“Volatility in China and falling commodity prices have created an unsettling environment for equity investors, but IPOs remained stock market darlings in 2015, dominated by the technology and financial services sectors,” said Mr Turner.
The top performing IPOs for the year were mostly small and mid-cap growth stocks – those whose IPOs raised less than $50 million of capital. Technology and media was the dominant sector, where major listing included share registry and superannuation services company Link Group and accounting software vendor MYOB.
Link Group shares were up more than 20 per cent at the start of February 2016, but overall performance in the sector was dragged down by MYOB, which was the second largest listing of the year.
“Despite US private equity firm Bain Capital retaining its 57 per cent equity because of strict escrow conditions, the stock has so far failed to impress investors,” says the report.
MYOB was one of only three private equity-backed IPOs in 2015 to record negative performance since listing to year end, the others being online furniture retailer Temple and Webster (down 23.2 per cent) and medical imaging provider Integral Diagnostics (down 13.4 per cent).
Other notable sectors included consumer goods and services, with three exits accounting for 14.1 per cent of total market capitalisation and average year-end gains of 36.3 per cent (including Next Capital’s float of Vitaco). Three retail listings totalled 8.6 per cent of private equity-backed market capitalisation and average gains of 17.7 per cent.
“It would appear these performances reflect the market’s evolving view of the future earnings potential and growth opportunities of these businesses and the industries they operate within, without specific disclosure from the businesses altering the strategy or financial guidance to that presented at IPO in their prospectuses,” said the report.
Mr Turner said that there were a comparatively low sell-downs by private vendors at the IPOs, “demonstrating their commitment to the post-listing growth. The majority of non-private equity vendors are floating their businesses to raise capital for future growth and liquidity, rather than electing to realise their investment at IPO.”
He said the outlook for 2016 is subdued in comparison with the last two years. “Market volatility is expected to impact IPO valuations in the short term and result in more trade sale and dual-track M&A processes for some IPO candidates. Technology and financial services, as well as consumer businesses that will benefit from lower Australian dollar and lower interest rates, will continue to drive IPO markets.”
Mr Turner said Healthcare would also be attractive to investors. “Despite being impacted by regulatory uncertainty and changes, we believe transactional activity will remain strong, with the IPO exit route for quality assets facing strong competition from offshore strategic buyers.
“On the demand side, fund managers remain well equipped to invest in IPOs given superannuation structures. High net worth individuals with ample liquidity will also join the pool of investors searching for growth and quality assets.
“A key theme for 2016 will also be innovation. While hopeful tech startups looking to follow the path of Atlassian’s listing success will be a large component of this trend, companies that provide solutions for Australia’s aging population and those that can tap into Chinese consumer demand will also present value propositions for investors.”