Despite what has generally been predicted to be another disappointing year for the initial public offerings (IPO), investors should not be so quick to turn up their noses at investing in floats.
This is the message emanating from accounting and financial advisory firm HLB Mann Judd, whose analysts follow the Australian IPO market closely.
Speaking to InvestorWeekly, HLB Mann Judd wealth management partner Andrew Buchan said that while IPOs are an inherently risky investment class, they should still play an important role in an investor’s diversification considerations.
“As part of an Australian equities allocation in a diversified portfolio, IPOs are worth looking at seriously,” he said.
In particular, he stressed that small cap IPOs could be an important part of maintaining a 20 per cent allocation in small cap equities – something HLB Mann Judd’s wealth managers advise as a blanket rule.
At the same time, Mr Buchan was cautious not to overstate the attractiveness of IPO investment, saying he was realistic about the risk profile. “A small IPO may well have volatility in the share price without a lot of liquidity or necessarily much broker research. So on a risk spectrum, IPOs are quite high,” he conceded. “But that risk may also lead to reward, as long as you do your homework on how best to gain exposure to the desired float.”
At the institutional level, Mr Buchan said that investment in IPOs is more likely to interest family trusts and funds representing high net worth individuals, but that all investors should be on the lookout for attractive floats as “they don’t come around too often.” Indeed, Mr Buchan said a result of just one or two positive investments in an IPO per annum would be considered a successful return.
Regardless of investor profile, Mr Buchan said there are a few key indicators to be looking for when investing in floats. “We look for companies that have a track record and have been around. We want management still around and participating, and ideally, with equity in the float and we make sure we know why a company has decided to float,” he said.
“Be wary of start-ups and lean towards companies that are sound operators already and are just looking to expand,” he warned.
The comments follow the release of the findings of HLB Mann Judd’s IPO Watch for January 2013 in Sydney last week. In a report detailing the findings, corporate and audit services partner Marcus Ohm wrote that “2012 proved to be a difficult year for new listings in the Australian share market, with less than half the number of successful IPOs of the previous year.”
However, there were some relatively positive signs. According to the report, new IPOs in 2012 recorded an average increase in share price of six per cent, while small cap IPOs ($0 to $10 million) managed year end gains of 35 per cent.
“2013 is set to start slowly, in the same way 2012 ended,” Mr Ohm wrote. “It is likely that the current uncertainties in both North America and Europe, as well as the commodity markets, will continue to weigh upon potential IPOs in the first half of 2013.
“Activity may increase in the second half of the year as these uncertainties are resolved and more stability, predicted by many analysts, returns to the market.”
