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U.S. initial public offerings (IPOs) are one of the year’s most sought after investments as billion-dollar offerings like Uber, Slack and Pinterest begin trading on the public market.
The second quarter of 2019 was in fact one of the busiest in years as the U.S. continues to lead the way in capital markets: According to Wise-owl research over 60 IPOs raised approximately US$25 billion.
Although many IPOs are already priced at the top end, the overall performance post listing has been staggering, which could stimulate demand further and see even more companies enter the market in the second half. Plant-based meat company Beyond Meat rose nearly 1,000% in the first two months before giving up some gains - still trading nearly 600% higher in mid-September.
In other words – there is no sign of slowing down. However, when everyone is bullish, I tend to be cautious as this may very well be the “peak” for U.S. Initial Public Offerings. Eventually the market will run out of steam and investors will look elsewhere for growth.
The primary market in Australia is not as exciting as the North American but we have seen several compelling and well supported floats in the first half of the year: Ecofibre Ltd (ECO:ASX), Next Science Ltd (NXS:ASX) or Uniti Wireless (UWL:ASX) just to name a few.
Some of the standout performers so far this year:
*Last traded price as of 24 September 2019. Source: Iress, www.smallcaps.com.au
The strong performance of the Australian stock market has created a favourable framework but the IPO market hasn’t always been this hot. We only need to go back 12 months as 2018 was mixed at best.
Many of the investors who sunk over $8 billion into IPOs that occurred last year are now holding shares worth less than they paid for them. In some cases a lot less. Volatility returned to financial markets in 2018, and, in particular the second half of the year, delivered muted returns for Australian investors. Many IPOs were pulled or postponed and the market was left with low quality listings, which naturally impacted returns. Investors shifted their strategies to preserve capital as opposed to taking on even more risk.
There have been underperformers in 2019 as well. Candy Club Holdings (CLB) is trading 50% below the $0.20 offer price (despite an 18% gain on day one) and other floats including Powerwrap Ltd (PWL), Life360 (360) or Whispir Ltd (WSP) have fluctuated post listing, currently trading in negative territory.
IPOs are very cyclical. The IPO market is very much predicated on market and investor sentiment. The investor risk appetite tends to increase when equity market conditions are favourable and decrease when markets are volatile. It’s a natural and understandable response as humans look at past experiences to draw possible conclusions for the future.
An interesting case study is the IPO of Splitit Payments Ltd (SPT), which was well supported largely due to the success of Afterpay Touch Group (APT). The share price of SPT soared eight-fold in the first three months after listing despite no material news. There is simply no rational explanation other than investors were expecting a similar performance as its peer.
While the initial trading period post listing is often sentiment driven, eventually reality will kick in and companies will have to deliver the numbers to support their valuation.
IPOs are gaining popularity not least because platform providers give investors greater access to the primary market. Historically IPOs were restricted to a small number of wealthy investors, but participation rates amongst retail investors is on the rise.
According to data provided by OnMarket, retail investors who are not participating in the IPO market are potentially missing out on lucrative returns. The average three-month simple return of all IPOs offered through the OnMarket platform in 2019 exceeds 55% (as of September 2019).
The variation of individual returns is very high, which is why Ben Bucknell, CEO at OnMarket encourages investors to take a “portfolio” approach – rather than ‘trying to pick winners’.
Needless to say, it's unrealistic to expect anyone to predict the unpredictable. IPOs have had a good run so far this year but 2018 showed how quickly sentiment can change.
Investors have been ignoring risks in recent times and continue to bet on high-risk assets to deliver superior returns. At this point the IPO market shows no signs of slowing down and 2019 could make its way into history books as an “upbeat year”.
Most importantly investors should assess each IPO individually and understand the opportunities and risks of the business before making an investment decision.