While commentators have focused almost exclusively on volatility, initial public offerings (IPOs) were one of the best performing investment classes of 2015, writes OnMarket BookBuilds' Tim Eisenhauer.
Investors are understandably feeling jittery about the stock market after landing in bear market territory this month, following a very volatile January, with global markets shaking on concerns of Chinese economic growth and, once again, the liquidity of global banks.
But this hasn’t stopped companies from accessing public capital markets in Australia.
Already this year, several companies have gone to the capital markets to source funds for business expansion – in contrast to the US where not a single company went public in January, the quietest January since 2011.
Only four biotech companies have floated as at mid-February. The poor performance of many issues in 2015 and the technology sell-off has reportedly weighed on US IPO activity this year.
In Australia, IPO investment returns fared very well last year. According to analysis of Dealogic data by OnMarket, the average return of the 93 companies that listed on the ASX in 2015 was 23 per cent by the year’s end.
Compare that with the ASX All Ords, which lost 4.3 per cent in the same period, and the asset class clearly outperformed. So-called large cap stocks also fared badly: the ASX50 lost 1.3 per cent, weighed down by losses for the big miners and big banks.
Contrast that with IPOs, where the odds of a positive return were better than two to one; in 2015, 59 per cent of IPOs finished the year at a price higher than their listing while 6 per cent held their ground.
Reflecting an active market, almost 20 more companies listed on the ASX in 2015 than in 2014.
Even more encouragingly, the seven IPOs which OnMarket technologies brought to market over the same period finished the year up an average 42 per cent.
Even the negative market in January and February will still have left those IPO investors well ahead overall.
In terms of listings this year, it has been a reasonably good start to the year for ASX-bound IPOs, with seven IPOs and 17 slated at time of writing.
For example, biotech company Recce has posted impressive gains since listing on the ASX in January. Internet security business Tesserent is also up this month after being well oversubscribed.
Software provider Novatti has largely held its ground while mobile gaming company iCandyInteractive is down modestly after both IPOs were oversubscribed.
So why aren’t investors running towards a segment of the market that is performing well?
The Dick Smith fiasco may have skewed investor perceptions of the risks of investing in IPOs.
This, however, has much more to do with perception than the reality: in 2015 at least, the statistics show that you were more likely to make money on an IPO than lose it.
Last year, of two of the most hyped private equity listings, Link finished the year up 17 per cent while the much-anticipated MYOB was down by 11 per cent.
Eclipx Group was a stellar performer, rising by 46 per cent by the end of the year.
Private equity owners, Ironbridge Capital, retained 40.6 per cent of the company, making a neat return, as did those who were lucky enough to access shares at time of listing.
The point for investors is that it’s not just a matter of what company you buy but when you buy it. In general, backing companies going public gives you the chance to get in on the ground floor.
The numbers tell a story that’s difficult to ignore: that a percentage of any well-diversified portfolio should be allocated to IPOs, either as a short or long-term holding.
For investors sitting on too much cash – and there are many – the easiest thing in the world is to do nothing.
But that’s not the way to grow wealth; inflation will eat some of it away. Over the long haul, shares are one of the best investments you can make because they offer both capital gains as their prices rise, as well as dividends.
IPOs are a particularly attractive sector of the equity market as the numbers above reveal – getting in early can reap substantial rewards.
In any case, in light of what appears to be the start of a volatile year for markets in general, IPOs are still going ahead and are an asset class that investors should be keeping a close eye on.
Tim Eisenhauer is managing director of OnMarket BookBuilds.
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