As part of the research house’s Australian Equities Small-Cap Sector Wrap, Morningstar senior analyst Mark Laidlaw said it was “no surprise” that there were mixed responses from small-cap managers about the IPO market in 2013/2014.
While most managers viewed the IPO market as an “overall positive”, concerns were raised about “lofty valuations”.
“One portfolio manager commented that as more and more companies headed down the IPO path that ‘You could float a brick in this environment’,” Mr Laidlaw said.
“This level of scepticism should be viewed positively as it shows managers were not getting caught up in the emotion that can accompany a raft of floats,” he said.
“Other common comments from managers were that the rushed time frames of a number of proposed listings meant a full level of due diligence was not always possible, putting pressure on investment teams to make quick decisions on whether to participate,” Mr Laidlaw said.
Mr Laidlaw also pointed out investors should be wary of managers that are either looking to “change their investment process” to justify taking a position in an IPO, or look to “take advantage” of them to artificially boost returns from a “post-float bump”.
“IPOs are simply one market dynamic among many that investment managers must deal with,” Mr Laidlaw said.
“What ultimately is important is what a manager is able to deliver for clients across a whole market cycle. As the old adage goes, ‘Form is temporary but class is permanent’,” he said.
