Record Point is an independent corporate advisory firm with operations in Sydney and San Francisco. We specialise in domestic and cross-border advisory services for public and private companies including mergers and acquisitions, capital raisings, corporate partnerships, debt advisory, restructuring, strategic reviews and valuations.
There has been a lot of recent commentary about the Initial Public Offering (“IPO”) of Latitude Financial Group (“Latitude”). By way of background, Latitude was previously the Australian lending operation of GE Money which was acquired in 2015 by a consortium of private equity investors. In an environment where terms like “fintech” and “buy now, pay later” are getting a lot of investor attention, Latitude’s second run at the Australian Securities Exchange (“ASX”) was highly anticipated as the largest IPO of the year, however its owners terminated the IPO when it did not receive sufficient investor support. Similarly the anticipated ASX IPOs of Onsite Rental (equipment rental), Education Centres of Australia (education provider), PropertyGuru (South East Asia-based online real estate classifieds), MPC Kinetic (pipeline and energy construction) and Retail Zoo (owner of Boost Juice) have recently been terminated leading to some speculation on the impact these might have on other pending IPOs in the 2019 and early 2020 pipeline. It is in this context that we thought it would be useful to take a step back and look at the status of the Australian IPO market in 2019 more broadly.
For the first three quarters of 2019, the ASX200 index performed strongly, increasing by 18.5% which was in-line with strong returns achieved by most other major global markets, and it continues to trade near the highest level in over 10 years. Similarly, the forward PE ratio of the ASX200 index, representing the ratio of price to anticipated earnings, continues to trade in the high teens reflecting strong and resilient public market valuations.
Over the same period, there were 37 IPOs on the ASX and an overwhelming majority have delivered good returns for investors, including 18 of the largest 20 IPOs. Positive performers include software companies such as FINEOS (+25%), ReadyTech (+18%) and Whispir (+1%), although Life360 has struggled, down ~25% from its IPO price.
Notwithstanding the above, 37 IPOs for the first 3 quarters of 2019 is far few than in 2018 and 2017 with 76 and 69 IPOs for the same period respectively. In addition to the number of IPOs declining, the aggregate size of the IPOs, representing the new capital raised, declined from $6.7 billion in the first three quarters of 2018 to $2.9 billion in the comparable period in 2019. Furthermore, in the final quarter 2019 there are currently expected to be up to 14 IPOs coming to market, which compares to 26 and 36 IPOs that ultimately listed in the last quarters of the previous 2 years. It is fair to conclude, that whilst the 2019 performance of the market and newly listed companies has been strong so far, IPO activity has meaningful declined.
Capital flowing into the ASX is heavily influenced by the Australian superannuation environment. As at the June 2019 quarter, approximately 51% of the $1.8 trillion of superannuation investments were invested in equities (almost half of which were in Australian listed equities) with almost $34 billion of new contributions entering the system in that quarter alone. Based on that information alone, it may seem unintuitive that more strong companies are not coming to market in order to raise capital and take advantage of the seemingly continuous flow of new superannuation capital seeking investment.
A key takeaway is that there is a divergence between investors’ appetite to invest in existing listed companies (including strong support for their follow-on equity raisings) as opposed to investing in new companies coming to market. There are many reasons why recent IPOs have not been successful, including market volatility and uncertainty, lack of earnings visibility and ultimately insufficient investor demand, making it clear that cornerstone IPO investors are being very cautious with their assessments of the quality of IPO candidates and their management team and are looking closely at the underlying business models and the achievability of forecasts. Another factor is that some private companies have become comfortable to bide their time through this period of uncertainty, taking advantage of low interest rates and an abundance of debt capital to support their growth strategies.
Despite the recent decrease in IPO activity, we continue to believe that the ASX is in good shape and is “open for business”. There are 5 companies who have targeted IPOs with proposed listing dates in November and we will be watching these closely. We expect that investors, who are flush with investable capital and have been starved of IPO issuances, will be supportive of investing in strong companies with aligned and motivated management at sensible valuations.
If you would like to discuss raising capital or realising value for your business, please get in touch with any of the Record Point team.
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Record Point is an independent corporate advisory firm located in Sydney, Australia and San Francisco, United States. Our team of professionals serves public and private companies across numerous sectors with a particular focus on healthcare, technology, consumer and industrials. Our team has more than 50 years of experience successfully leading and executing in excess of A$30 billion in transactions.