Get ready for a rush of initial public offerings (IPO) before 31 December and much stronger IPO activity in 2011 if the share market holds up.
After a dreadful three years for IPOs, many small companies are bursting to raise equity capital and list, and owners of several large assets are eager to exit their investments. It won't take much to spark sharply higher IPO volumes and values in 2011.
December is typically strong for IPO volumes as companies race to list before year's end. The IPO cycle picks up again after the February interim reporting period and again after the August reporting period as fund managers and analysts have time to focus on new offers rather than company profits. This cycle breaks down if the share market falls and risk appetite wanes.
The Australian Securities Exchange website shows 31 companies with live IPOs - the most in three years.
With the exception of the $5 billion QR National float and the $80 million Kula Gold offer - the year's biggest gold IPO - most floats are tiny. That will change if the share market continues to rally and much larger floats come to market in second quarter 2010.
Also, more floats of established industrial companies will feature in a mining-dominated IPO market.
There are plenty of candidates. The shelved $1.2 billion float of Valemus, the Australian business of German contractor Bilfinger Berger Australia, could reappear in 2011. Private-equity held assets, such as sporting goods retailer Rebel Group, which abandoned a float this year, might also list. A $3 billion-plus float of PBL Media, owner of ACP Magazines and the Nine Network, is possible.
It would take an almighty share market rally to see the IPO market back at 2007 levels when 242 IPOs collectively raised almost $10 billion. But there is such pent-up demand to list and so many large private-equity-owned assets waiting in the wings, that such figures are possible if - and only if - the market rallies in 2011.
Private equity firms that thought about exiting investments through share market floats in early 2010, only to recoil as the European sovereign debt crisis shook the market, will not want to miss the next opportunity to sell their debt-funded investments at decent prices.
The best clue will come from the success of the QR National float. Newspaper reports suggest local fund managers have baulked at the offer's $2.50 to $3 share price range, high price earnings ratio of 21 to 25 times next year's earnings and low dividend yield. A big test will be the willingness of foreign investors to pay for exposure to Australia's coal industry via QR National.
A poor post-listing performance from QR National, if it happens, combined with the weak show of Myer Holdings shares since listing in late 2009, would seriously dent investor confidence in larger IPOs. Add to that market suspicions about investing in private-equity floats, and fears of buying into resource floats at the top of the mining boom, and the IPO market might not be as buoyant in 2011 as some commentators suggest.
Investors will need to invest cautiously in IPOs as the hype builds next year. An enormous amount of IPO rubbish could come to market if commodity prices race higher.
The usual 10-plus per cent discount between the IPO price and the valuation ascribed to the company by directors seems to have eroded in recent years, even though unknown companies, or those with no history as a listed entity, have much more risk.
Translation: too many floats are overpriced.
Still, there will be plenty of strong IPO opportunities for patient investors next year. Investors who rush into overpriced floats will watch their performance sink.
