is an investment and financial services company specialising in Investment Banking, Corporate Advisory and Share Trading services for Australian corporate and private clients, and overseas corporate clients.

  • Address: Level 24, Royal Exchange Building, 56 Pitt Street, Sydney, NSW 2000 Australia
  • Phone: +61 2 9375 0100
  • Email: Contact Us

News and discussions from Novus Capital


Australian IPO Report 2018 - HLB Mann Judd

Gavan Farley - Wednesday, February 20, 2019

Total funds raised in initial public offerings (IPOs) in 2018 hit $8.44 billion, up 106 per cent on the 2017 total of $4.09 billion, although the pipeline into 2019 reflects a softening of the market, according to the latest HLB Mann Judd IPO Watch report.

“Despite the increase in funds raised, there were only 93 initial public offering (IPO) listings on the ASX in 2018, down from the 110 new market entrants in the previous year, but in line with the five year average,” said Marcus Ohm, author of the report and partner at HLB Mann Judd Perth.

“Unusually, for recent years, there were a number of $1 billion+ cap companies listing during the year.

“The three largest IPOs of the year (Viva Energy Group, Coronado Global Resources Inc. and L1 Long Short Fund Limited) raised $4.75 billion between them – 64 per cent of the total funds raised.

“As well as being one of the few growth sectors for the year, the Materials sector recorded the most listings – with 35 listings representing 38 per cent of all IPOs undertaken – compared to 29 listings in 2017.”

Continuing the trend of the past few years, small cap companies – those with a market capitalisation of less than $100 million – continued to make up the bulk of new entrants to the IPO market, Mr Ohm said.

“There were 72 small cap IPOs undertaken during the year, down on the 88 of the previous year, but nevertheless representing 77 per cent of the total IPO market.

“The total also remains well above the previous five year average of 50 listings.”

Mr Ohm said some companies had difficulties raising capital during the year, and this is reflected in the total number of IPOs that did not meet their capital raising goals.

“Only 72 per cent of all new listings were able to meet their target, which was down on both the 2017 and 2016 years which saw 79 per cent and 83 per cent of targets met respectively.”

Mr Ohm added, on average, IPOs in 2018 experienced an underwhelming share price performance subsequent to listing.

“New markets entrants recorded an average first day share price gain of 5 per cent, but only 47 listings ended their first day above their listing price – a rather poor result given that the issue price of these IPOs was typically discounted.

“Year end gains were disappointing too, as on average, new IPOs for the year decreased in share price by 18 per cent by year end. This is a worse performance than other market indicators, with the ASX 200 recording a decrease of 7 per cent for the calendar year.”

The year end losses made by a significant number of IPOs in 2018 and general market conditions suggest that there is likely to be a reduction in IPO activity in the coming six months, Mr Ohm said.

“Unsurprisingly only 17 companies had applied to list on the ASX at the end of 2018, well down on the 37 that had applied at the same time in the previous year.

“The companies that have applied are hoping to raise $179 million, which is a 70 per cent reduction on the $603 million sought at the end of 2017.

“Materials stocks made up the majority of the proposed listings with seven listings, showing market sentiment still remains for this sector.

“Overall the pipeline appears to be soft and reflects the performance of IPOs and the wider market. This was evidenced in the final quarter of 2018 with sentiment perhaps being an important factor.

“Companies considering listing will need to clearly articulate their offerings and provide sound investor communication.”

HLB Mann Judd is an Australasian association of independent accounting firms and business and financial advisers, with offices in Australia, New Zealand and Fiji.

* Emerging, or small cap, companies are defined in this report as those with a market capitalisation of $100 million or less. All data excludes property trusts.

2018 - Half Year IPO Report

Gavan Farley - Wednesday, August 29, 2018

Deloitte Half Year 2018 IPO Report

IPOs struggle to make first half mark as second half looks brighter

Australian IPOs delivered a muted performance in the first half of 2018, with more losers than winners, but positive global performance, a record year for US markets and strong local economic fundamentals, provide a real sense of optimism going into the second half.

Key Points from Deloitte's latests IPO update covering the half year yo 30 June 2018 include:

  • 40 companies successfully listed, raising $1.8 billion, compared to 57 listings in the same period in 2017
  • 16 (40%) experienced negative returns, with weighted average performance of -1.5%
  • Financial services was the dominant sector, accounting for 89% of the capital raised - however listed investment funds represented a significant proportion of the raising
  • Only 10 (25%) of the listings raised capital in excess of $75M
For more on this topic  go  to  Deloitte's  Australian website

2017 - Deloitte Australian IPO Report

Gavan Farley - Thursday, February 01, 2018

2017 -  Australian IPO Highlights

Australia’s IPO market delivered more than a few surprises in 2017 - including the largest number of ASX listings since the global financial crisis (GFC) and a remarkable performance overall.
According to Deloitte’s 2018 IPO review:
  • 115 companies successfully listed in 2017, compared with 94 in 2016 and 97 in 2015
  • Weighted average performance for the year was 36.0%, the strongest seen over the recent years
  • $6.7 billion of capital was raised, down approximately 15% on the prior year
  • Market capitalisation of $11.1 billion
  • 29 IPOs exceeded $75 million in market capitalisation, accounting for 87% of all new capital raised
  • Financial services was the dominant sector, accounting for nearly 47% of the listed market
  • 86 small cap/emerging companies comprised 75% of new listings by volume, with $820 million of new capital raised and new market capitalisation of $2.2 billion
  • 25 overseas-based companies successfully listed on the ASX, raising $512 million and achieving end-of-year market capitalisation of $1.71 billion.
  •  Deloitte IPO Report 2018 Download the report at the Deloitte  Australian website


The Future of Cash

Gavan Farley - Monday, July 10, 2017

Cash is falling out of fashion – will it disappear forever?

Image: An Indian man displays new currency notes of 2,000 Indian rupee.AP Photo/Ajit Solanki Bhaskar Chakravorti, Tufts University

On June 27, the ATM turns 50. Former U.S. Federal Reserve Chairman Paul Volcker once described it as the “only useful innovation in banking.” But today, the cash that ATMs dispense may be on the endangered list.

Cash is being displaced in so many ways that it’s hard to keep track. There are credit cards and electronic payments; apps such as Venmo, PayPal and Square Cash; mobile payments services; cryptocurrencies that operate outside the purview of central banks; and localized offerings such as Kenya’s mPesa, India’s Paytm and Bangladesh’s bKash. These innovations are encouraging cashlessness across communities worldwide.

It’s reasonable to expect cash to follow the path of other goods that have been replaced by digital alternatives, such as photos, music and movies. Will cash – and the ATMs that dispense it – experience a “Blockbuster” moment and disappear from our neighborhoods?

Not so fast. Cash will likely become less popular, thanks to the high cost of using cash and the growing array of alternatives. But I expect it will remain with us forever. The future will be “less cash,” rather than cashless.

The cost of cash

As of 2013, approximately 85 percent of the world’s transactions involved cash.

Reliance on cash is quite uneven across the world. While Singapore, the Netherlands, France, Sweden and Switzerland are among the least cash-reliant countries, in Malaysia, Saudi Arabia, Peru and Egypt, only 1 percent of transactions are cashless. Even some highly advanced countries, such as Japan, are still highly reliant on cash.

Cash usage in the U.S. is still high relative to EU countries. In 2015, cash usage in the U.S. represented 13.1 percent of its GDP, whereas it represented just 7.1 percent in France and 4.5 percent in Switzerland.

Concerns about social equity offer one motivation for lawmakers to push for cashless alternatives. My colleague Benjamin Mazzotta and I have studied the costs of cash across a wide range of countries, with a particular focus on the U.S., Mexico, Egypt and India. Our research shows that the poor and those with less access to institutions bear a disproportionate share of these costs of using cash.

Check cashing institutions are well known for their convenience, despite their fees.Doran/flickr.com, CC BY-NC-ND

In the U.S., for example, cash usage imposes a regressive tax on consumers, with the highest impact on people who do not have an account with a bank. We found that the unbanked pay four times more in fees to access their money than those with bank accounts. They also pay US$4 higher fees per month for cash access on average than those with formal financial services. Such fees include those charged for payday lending, buy-here-pay-here auto loans and check cashing. The unbanked have a five times higher risk of paying cash access fees on payroll and EBT cards.
Poorer consumers also have to spend far more time getting cash. On average, Americans spend 28 minutes a month traveling to get cash, but that time isn’t evenly distributed. People who don’t use a bank spend about five minutes longer getting to the place where they can get cash, and unemployed people spent nearly nine minutes more.

In the meantime, other scholars have argued for the benefits of a “less cash” society. Ken Rogoff at Harvard has argued that eliminating higher-denomination banknotes can prevent currency from being used to fund illegal activities.

A world without cash

A combination of public and private initiatives are currently chipping away at the global predominance of cash, with some countries moving more quickly than others.

Sweden, already high on the cashlessness scale, may become the first country to come close to a truly cashless state. Sweden’s history in banks promoting cash alternatives dates back to the 1960s, with digital bank transfers used to pay wages. Cards also become more popular in the 1990s, when banks also started charging a fee for checks. The app, Swish, developed by the major banks, is widely used today for digital money transfers by nearly half the population. Many businesses discourage use of cash, and retailers are legally allowed to refuse cash.

In several other countries, governments are experimenting with innovative digital alternatives. In 2012, the Royal Canadian Mint launched the MintChip project, recently handed over to the private sector. The plan is to store cash on computer chips, enabling the transfer of money between chips through encrypted messages.

In some countries, the private sector has led the way, creating “less cash” societies in the unlikeliest of places. Consider Somaliland, one of the poorest countries in the world. It stands at the forefront of a mobile payment revolution with its ZAAD platform. At over 30 mobile payment transactions a month on average, the average citizen of Somaliland is far ahead of the rest of the world’s average of 8.5 such transactions per capita per month.

In India, thousands of people waited in bank lines to exchange their old money for the new denominations.AP Photo/Rajanish Kakade

Perhaps the most dramatic nudge toward “less cash” was experienced recently in India. Last November, the Indian government made a high-risk, high-stakes move by demonetizing the 500 and 1,000 rupee banknotes, in effect voiding 86 percent of cash in circulation. Their initial aim was to root out corruption and illegal activity funded by cash. New 500 and 2,000 rupee banknotes were issued, so consumers had to go to a bank and exchange their demonetized currency.

In a country that is almost 90 percent reliant on cash, this move led to disrupted enterprises, unpaid wages and long lines at banks. Mobile wallet players were the unqualified winners of the decision, with market leader Paytm claiming a 435 percent increase in traffic and a 250 percent increase in overall transactions and transaction value.

However, despite the surge in mobile payments after demonetisation, cash in India remains resilient. In March, five months after demonetisation, cash withdrawals were actually 0.6 percent higher than a year earlier.

The future of cash

What explains the resilience of cash, despite its costs and a growing array of alternatives?

Cash is unique among payment instruments in that anyone can transact, any time, any place, with no third parties involved. With this freedom comes strong privacy protection. Currency neither knows nor cares who holds it or when and where a transaction occurred. People have a visceral sense of security when they have cash with them. Much of this sentiment was uncovered in our Cost of Cash studies spanning multiple countries.

These thresholds will, of course, evolve as our societies become more digitally native. However, old habits and perceptions take a long time to turn over. Some merchants will resist the costs of new equipment or fees that accompany cash alternatives. Cash is also considered more convenient and versatile, while with digital transactions there’s always concerns about hacking and fraud.

The ConversationSo, no matter where we are in the world, let us celebrate the ATM’s half-century of service. The human connection with cash will be hard to break. Though cash may become less popular, rest assured that there will always be someone who will stop you in the street asking for directions to the nearest ATM.

Bhaskar Chakravorti, Senior Associate Dean, International Business & Finance, Tufts University

This article was originally published on The Conversation. Read the original article.


2016 IPO Report - Good year for for Smaller Companies

Gavan Farley - Friday, March 17, 2017


2016 IPO Report: Good Things Come In Small Packages

2016 was a strong year for Australian companies floating on ASX. The number of IPOs rose to 96 (from 85 in 2015), implying an average of eight per month or two a week – certainly enough to keep the most active investors busy... Though the absolute number of new floats increased, the market capitalisation at listing of these new ASX entrants was lower in 2016 than the prior year. Signalling a return to the smaller end of the market and, in the fourth quarter, a degree of ‘deal fatigue’ on the part of investors as many of the larger floats planned for this traditionally busiest quarter of the year were pushed into 2017.

On performance, investors had little reason to complain on average: IPOs outperformed the ASX200 index by 18% and returned an average of 25% at year end. And more so because the best performance was seen at the smaller end of the market. New floats that issued less than $50 million outperformed those that issued more than $50 million by 17.5% at year end, an encouraging statistic for investors taking a portfolio approach to IPO investing.

First day returns were also impressive and increased by 5% on the prior year, indicating either strong aftermarket support and a good investor following, or a strategy to leave some room for a price rise in the way new issues have been priced.


Screen Shot 2017-02-15 at 8.52.36 AM.png


Living in a VUCA World

Gavan Farley - Wednesday, November 23, 2016

Living in a VUCA World

Today I was fortunate enough to be invited by a good friend and associate at Cube Capital Hani Iskander to attend a quick briefing by the owner of Williams Inference, John Trudgian. Williams Inference, a business intelligence service, was started 1965 in the USA by James Williams and is based around the idea that by observing human behaviour, looking for anomalies, one could spot trends early and take advantage of them to build into your investment strategies. The service is subscribed to mainly by major fund managers, and they get a quarterly presentation from John or one of the team, which distils collates and interprets information from over 200 publications, financial markets, books film TV and the web.

A world wind one hour ride

John took us on a ample ride through his most recent quarterly report. We only had an hour… (it normally takes two or three) The theme of this report, which was written before Trumps upset victory is summarised in the following quote…:

“We are moving from a world of problems, which demand speed, analysis and elimination of uncertainty, to a world of dilemmas, which demand patience, sense making and engagement with uncertainty” – living in a VUCA world

Birds are Singing Earlier

We started with…. Noise and a story about how naturalist are observing how birds are beginning their dawn chorus some two hours before sunrise. The reason given is that we humans are making so much noise, that the birds have to start earlier and earlier, in order to be heard… this story lead onto developments in technology designed to bring back some peace and quiet. Noise cancelling head phones, especially amongst professionals such as pilots is a big and developing market…

Talking not Typing

the noise theme then morphed into new ways to interface between our ever-present device, and the problems of using Siri, Cortana and other voice user interfaces in our devices. It turns out that the main reason that these devices don’t work as well as they should is due to background noise. Aftercall we can speak on average 150 words a minute but type at less than 40 wpm. This lead to an article about a firm called Kopin that has a completely new approach and can achieve accuracies over 90% in standard environments… Kopin predicts that this breakthrough will mean that by 2020 50% of queries will be voice generated.

Augmented Workforce

From Voice and smartphones, we made a small leap to augmented reality and its use, not in gaming but in industry, healthcare, training for high risk jobs, and inevitably … to how the porn industry is adopting to this new technology….

No Sex in Japan

From there we were lead across the se to Japan where changes in demography and family structure such that 70% of Japanese under 34 are single and 40% are still virgins, and just across from Japan, China is experiencing significant declines in marriage rates and increasing divorce rates. India the same. So what, you might say; these things have been happening in the west for decades, but that’s the point, what has taken two or three generations to happen in the west, is happening in these counties within one generation. What concerns, opportunities can be inferred by these trends….

The Device Man

And now our next stop on this whirlwind tour was around the theme of device people… our addiction to phones and online communication and how it is changing how humans interact. I commented to the group on how some people check the current weather on their phone, while sitting next to a window. People sit at the same table, texting each other…

Serial Dating – Serial jobs

this led to dating sites, the gig economy, the lack of security, permanence, planning for the future, even how the use of cosmetics has spiked as people (men and women) put on makeup, not to look better in person, but to make them look better in photos, selfies. Did you know that campus bookstores in the USA now have large cosmetic sections., which then led to a story on how Deutsche Bank is now using technology for matching people on dating sites to match new recruits. our hour was almost up… and we looked at the gender gap in the work force particularly in the upper echelons, and why it is so persistent… but no time to pause and we had to move on… we touched on money, dynamic pricing, such as Ubers surge, Amazons variable pricing, and the feedback loop to earlier mentioned trends of piece meal work,, the zero hour on-call work contract, instant and serial dating…

The VUCA World

and finally at the 55th minute… we arrive at the VUCA world. VUCA.. purportedly a US military acronym… coined at the end of the cold war, standing for Volatile, Uncertain, Complex and Ambiguous.

Thus our journey ended, but it was an amazing trip that generated so many ideas m of how things connect, or not. The skill in investment management is to try to take a view of what all these things going on around us might mean. We are often so busy, just doing our daily routines, living in our bubble, we can’t get out. We should do it more. You can get more info on John @ http://competitiveintelligence.ning.com/profile/JohnTrudgian. The web site http://www.williamsinference.com/ is undergoing a re-vamp but there is some great archival material there


Snap Inc IPO

Gavan Farley - Friday, November 18, 2016

It is hard to see how Snapchat parent Snap will live up to expectations after its IPO

David Glance, University of Western Australia

Snap, the parent company of Snapchat is looking to go public with an IPO in March of 2017. Snap has filed its intentions secretly with the US Securities and Exchange Commission (SEC) and it is expected to be valued at between US $20 and $25 billion. Snap’s current earnings are not publicly disclosed but because its filing with the SEC was private, they are thought to be less than US $1 billion per year.

There was a time when the public’s enthusiasm for social media companies was such that Snap’s valuation would never have been questioned. When Twitter listed on the stock market, it was valued at US $25 billion, a price only made believable by the optimistic view that Twitter would eventually find a business model that would drive phenomenal growth. It didn’t do that of course, and 3 years later, its value is 50% of that initial value, it is laying off staff and it recently couldn’t persuade anyone that it was worth buying. Twitter is now a company with few prospects and facing enormous challenges to put in place meaningful ways of generating revenue.

Given how hard it is to find ways to make money from social media outside of advertising, it is not clear how Snap intends to make the sort of money that would justify its very high valuation. Facebook has succeeded so far with advertising because the platform is ideally suited to finding out a great deal of information about users that can then be used to deliver targeted ads in multiple formats. But even Facebook is starting to find that there is a limit to how many ads they can load onto someone’s news feed.

Twitter and Snapchat are at an immediate disadvantage as advertising platforms because they have far less capacity to find out meaningful information about their users but also far fewer options of how to present them ads. Both Snapchat and Twitter are hoping that they can transform themselves into media companies and get their users to consume video from companies through their platform. However, in the media space, they are up against much better competitors like Google, Facebook, Amazon and even Apple.

Snap has recently branched out into hardware with the launch of Spectacles, sunglasses that are fitted with a camera that can take short videos to store and publish through Snapchat. Although Snap’s Spectacles are certainly less geeky than Google’s Glass glasses, they may suffer from the same social stigma that ended Google Glass as a consumer product. It is also not clear why people would want to wear glasses with camera on the off chance that there was something worth filming for 10 seconds. Even if “Specs” is a successful product, it still would only generate a tiny fraction of the revenues that Snap will have to make to justify its price.

The other challenge Snapchat faces is in its core functionality and the battle for users’ time. Snapchat’s features have been largely duplicated by Facebook’s Instagram. Instagram also has twice the number of daily active users than Snapchat.

The difference between the two services is in the type of communication that each allows, Snapchat’s original focus was on disapearing messages that could be used for “sexting”. Although this has become a smaller part of the reasons why people use Snapchat, the ephemeral nature of Snapchat messages is really about humorous, but essentially trivial, types of communication.

Other apps like Facebook Messenger and WhatsApp also now allow secure and private communication making Snapchat less unique.

Unlike Snapchat, Instagram tends to encourage photos that are more considered, encouraging a broader range of quality and communication. This is mostly because the photos are enduring and intended for larger audiences. At the end of the day, a social network is where your friends are and all of them are likely to be on Facebook, far less likely to be on Snapchat.

There is an overwhelming sense that Snap is trying to raise money for its service now, because it can. Seeing Twitter’s struggles must be a sharp reminder that staying relevant as a social media platform is not a given, despite early success. Snap will also find that being public and having its performance constantly scrutinised is going to be extremely tough going.

For shareholders and investors, IPOs are known as an “exit strategy”, a way of realising the gains on your investment or unlocking the value of your shares as one of the founders or employees. An exit strategy may be appropriate in the case of Snap given that it will be incredibly hard to maintain revenue growth when your principle audience is extremely young and fickle.

The Conversation

David Glance, Director of UWA Centre for Software Practice, University of Western Australia

This article was originally published on The Conversation. Read the original article.


Why Stock Market Panic can Signal a good time to Buy

Gavan Farley - Tuesday, November 01, 2016

Explainer: why stock market panic can signal a good time to buy

Lee Smales, Curtin University

Financial markets around the world are responding to current political uncertainty in both Australia and the UK by sending stocks, bonds and currencies on a rollercoaster ride.

The far-reaching implications of Brexit caused the S&P/ASX 200 volatility index (A-VIX) to spike to the highest level since the start of 2016. Similarly, the A-VIX jumped 5% in the opening minutes of trading on Monday after it became clear the federal election would remain unresolved.

Investor sentiment (A-VIX) responding to political uncertainty.

The VIX essentially gives an indication as to the market expectation of price volatility over the next 30 days. Since the main participants in the option market tend to be investors seeking protection against declining prices, the VIX tends to rise when investors are anxious about falling markets – giving rise to the colloquial term of the “fear gauge”.

Why investor sentiment is important

In theory, asset values should be determined by competition among rational investors. Such competition makes for prices that reflect “fundamental” values - basically the discounted value of expected cash flows. But in reality we know this is not always the case. For instance, based on the discounted value of rental income, the Australian housing market is currently far above fundamental value. Essentially, “sentiment” reflects the irrational behaviour that pushes prices away from the underlying fundamentals.

The uninformed traders who exhibit this irrationality are often called “noise” traders, and theory suggests that over time they will lose sufficient capital to be forced out of the market. The trouble is, constraints can mean that even the most informed trader could become insolvent before the market reflects fundamental values. With this in mind, it is important to understand what sentiment is, how we can measure it, and how it might impact asset prices.

The theory on investor sentiment suggests that positive sentiment will drive prices above fundamental value and provide above average returns in one period. In the next period, the misvaluation will be corrected. So periods of positive sentiment are followed by periods of below average returns, and vice-versa. That is the theory, but how can we empirically test it?

A self-fulfilling prophecy

A major issue that we have is that sentiment cannot be directly observed, and so we have to use alternate measures as a proxy. A number of alternatives have been suggested, these are often based on surveys (such as consumer confidence) or market variables (such as trading positions) with varying degrees of success in explaining market movements.

A further complication in researching the effect of sentiment is that it is often difficult to disentangle sentiment from market movements as they are often self-reinforcing. To think of why this may be, consider media reporting of movements in the stock market. If the stock market goes up, then the media writes glowing reports and this entices additional “noise” traders into the market. More shares are bought, pushing prices higher, and producing further positive media commentary. This can often continue until we are in bubble territory.

Two important proxies for investor sentiment

Aside from volatility indices like the VIX, there is also a composite index that uses the principal components of six individual proxies related to market activity (this includes share turnover and the number of IPOs).

The researchers that developed this index used it to explain stock returns over a lengthy period running from 1963. They found that investor sentiment had a greater effect on stocks in small, young, and high-growth firms. The index data is available here, but ends in 2010.

Relationship between Baker Wurgler sentiment index and stock market returns.

What the research says about sentiment and returns

Research has shown that VIX and stock prices have a strong contemporaneous relationship, where VIX increases as stock prices fall. Perhaps more importantly, VIX is also useful in forecasting price movements in future periods.

When investor fear is high, stock prices are pushed below fundamental values. In the next period, when the level of risk aversion reverts to some norm, stock prices move back towards the equilibrium level and generate above average returns. This fits well with the underlying theory of investor sentiment.

Relationship between investor fear and stock market returns. Data sourced from DataStream

Interestingly, investor fear in the stock market is also informative for returns in currency markets and bond markets, suggesting that the effect of sentiment is pervasive across asset classes. And sentiment also effects the way in which markets respond to news events, such as economic data releases, with stronger, more volatile responses tending to occur when investor sentiment is low (alternatively, fear is high).

Political uncertainty can drive sentiment

Right now many investors are unsure about how government policy will impact them directly, via taxation and superannuation reform, and indirectly through the effect of policy (or lack of policy) on business investment decisions.

For many investors, this remains a time to be cautious. However, history has shown that the best returns are often to be found by buying when investor fear is at its highest.

The Conversation

Lee Smales, Senior Lecturer, Finance, Curtin University

This article was originally published on The Conversation. Read the original article.


Seven Ways to tell whether a Private Equity backed IPO should be avoided

Gavan Farley - Thursday, September 01, 2016
Mark Humphery-Jenner, UNSW Australia

Private equity-backed IPOs (Initial Public Offerings) have come under significant scrutiny following several high-profile failures: but are these representative or merely anomalous blights on an otherwise well-performing sector?

Last week, the proposed private-equity backed listing of Guvera music was blocked by the ASX following concerns raised by the Australian Shareholders Association over its business model and valuation based on earnings.

Guvera were looking to raise $100 million in an IPO that valued the business at more than $1.3 billion, despite the fact that it lost $81 million last financial year on revenue of just $1.2 million. The move by the ASX follows Guvera re-issuing its prospectus after scrutiny from the Australian Securities and Investment Commission (ASIC).

Another notorious PE-backed IPO was the 2012 float of Dick Smith, backed by Anchorage Capital. It ended in significant losses for initial investors and was dubbed by Forager Funds Management analyst Matt Ryan as “one of the great heists of all time”.

The high-profile the IPO of Myer, backed by TPG Capital, also performed poorly: Myer listed at $4.10 per share, fell to $3.75 per share on the first day of trade, and fell to $1.20 per share by the end of 2015.

However, several other PE-backed IPOs have performed strongly between 2013 and 2015, including Aconex, Ooh! Media and Mantra group. This raises the question of whether the average PE-backed IPO underperformance and what factors might investors look out for.

Do PE-backed IPOs necessarily underperform?

So should investors make a rule to avoid PE-backed IPOs in general? In fact, there is little evidence that PE-backed or VC-backed IPOs underperform for investors. In Australia, from 1994 to 2005, the difference between VC/PE backed IPOs and other IPOs is not statistically significant.

The Australian Venture Capital Association Limited (AVCAL) in conjunction with Rothschild reports that while non-PE backed IPOs did perform better in 2015 than did PE backed ones, PE-backed IPOs outperformed from 2013-2015. AVCAL argues that “PE-backed IPOs strongly outperform non-PE backed IPOs after the first year of listing”, with PE-backed IPOs outperforming non-PE backed IPOs by 23% during that one year after listing.

Similarly, Deloitte argues that “the performance of private equity backed listings suggests results are far more positive than market sentiment reflects” and that $1 invested in each PE-backed IPO since the beginning of 2013 would yield an average return of 48% by the end of 2015.

Using the set of ASX listings for at least A$100 million reported by AVCAL (and their classification of whether a firm is PE-backed), we can look at the average value of $1 invested in each of the PE-backed IPOs versus $1 invested in each of the non-PE backed IPOs.

When doing so, to avoid the possibility of outlying PE-backed firms experiencing super-positive returns and this biasing the results, the daily return is winsorized (limiting of extreme values) and any return over 100% is excluded (this adjustment actually biases in favor of the non-PE backed IPOs).

The below graph, which is consistent with that produced in the AVCAL report, demonstrates that PE-backed IPOs outperform their non-PE backed counterparts. A similar trend appears over longer two-year and three-year time horizons (though, more recent IPOs will not yet have had the opportunity to accrue such a lengthy return history).

Average value of $1 invested after an IPO in PE-backed and non-PE backed companies in the sample.

The findings its wrong to suggest PE-backed IPOs do not underperform on average - while there are some instances of underperformance, the average PE-backed IPO actually performs strongly.

Seven factors investors should consider

This suggests that PE-backed IPOs do not necessarily underperform. But clearly, not all PE-backed IPOs will outperform either. So here are seven factors associated with post-IPO performance investors should look for:

  1. Length of investment. The length of the PE-fund’s involvement with the company will help to indicate if the PE fund actually contributed to the company. In several poorly performing PE-backed IPOs (such as Myer and Dick Smith) the PE fund had invested for only one to two years. When at least part of that time is also spent preparing the company for listing, this would likely be insufficient time to fully transform the company. Clearly, the time required to improve the company will depend on its complexity, but a typical situation would often call for several years of PE-investment prior to IPO.

  2. Prior litigations. Companies backed by VC and PE funds that have been sued recently (or for whom their portfolio companies have been sued) warrant further scrutiny. Funds that have been sued have difficulty attracting future funding and if investors are reticent to invest in the fund itself, it could imply beliefs about how the fund might manage companies it lists on the market.

  3. The backer’s portfolio size. VC and PE funds that are larger and invest in more portfolio companies tend to perform worse because they spread themselves too thinly across portfolio companies, suggesting that their portfolio companies my perform worse.

  4. Distance between the company and its backers. The geographic distance between the PE (or VC) fund and the portfolio company could be a concern. For example, an overseas based fund might face greater barriers to a successful outcome.

  5. Number of backers. A company with more interested pre-IPO investors is likely to have greater growth prospects and has more scope for the disparate investors to pool their expertise to aid the company. However, there are diminishing returns to having more backers, with each additional supporter likely to have less scope to incrementally benefit the company.

  6. Geographic diversification of the backers. To an extent, a backer who has supported more companies in multiple industries and multiple regions can have gained a breadth of experience and connections with which to impart the portfolio company. There are limits, with excess diversification potentially causing the fund to spread its attention too widely. The fund’s record would help to indicate whether such diversification has benefited the fund’s investments previously.

  7. PE fund’s continued involvement in the company. It is generally a positive signal if the PE fund that continues involvement in the form of board positions or ownership stakes (exceeding the minimum time, or amount, legally required).

Essentially, while investors should always examine each IPO on its merits, there is no reason to avoid PE-backed IPOs per se.

The Conversation

Mark Humphery-Jenner, Associate Professor of Finance, UNSW Australia

This article was originally published on The Conversation. Read the original article.


IPO Report 2016

Gavan Farley - Friday, June 17, 2016


In spite of a shaky start to 2016 for Australian and global markets, local IPOs are generally bucking the trend. 2015 saw:

  • 97 ASX IPO listings (up 33% over 2014), with a market capitalisation of $17.6 billion and capital raised in excess of $8.6 billion;
  • Technology and financial services were the dominant sectors and will continue to drive IPO activity over the next 12-18 months;
  • IPO performance continues to beat market expectation with average gains of 18% weighted by market capitalisation; and
  • Extended gains for 2014 listings, which closed the year 37% above their 2014 listing price.

Buoyed by a year of record IPOs and solid performance in 2014, the ASX finished 2015 with IPO performance firmly in positive territory, although the index itself was weighed down by energy and resources stocks. Weighted performance for the year's listings averaged 18.2% at the end of 2015 through the 97 new entrants to the ASX, with total market capitalisation of $17.6bn.