The recent market trends have showcased why IPO market has been reported to have outperformed in the stock market while even beating the blue chips. Let us take a look into this given the following:
IPO market tends to generate better returns than the index performance: IPO market is performing better than overall market and especially blue chip companies quite lately. It is a very interesting fact that share prices of 93 floats of 2015 were up 23% by end of last year (as per Dealogic and OnMarket BookBuilds) as compared with S&P ASX 200 index, which was down by 3% during 2015. The trend continued in the current year. The 13 IPOs that entered the market during the first quarter of this year, have average return of 1.3% by March 31 while S&P/ASX 200 witnessed a loss.
IPO Listings (Source: Deloitte 2016 half year IPO market update report)
As per the information revealed by OnMarket BookBuilds, Q2FY16 witnessed an average gain on the 21 companies listed on ASX of about 33.5% as compared with just 3% gain by S&P/ASX 200 index (as per). During 2016, the average return of 34 companies listed till June 2016 was reported to be 23.3% while the same period previous year recorded a gain of 6.5% by 27 companies floated till first half of 2015.
Second quarter IPO performance (Source: OnMarket Bookbuilds)
Lucrative Technology and Finance IPOs: Newly listed companies are generally seen from technology, financial, and real estate sectors which have been performing better as compared to the mining sectors. Investors have been putting money in these sectors as Australian economy is in transition from the mining industry to other service based areas like finance and information technologies (IT). The sector breakdown indicates that IT and finance sectors’ floats together accounted for 50% of all IPOs in 2016. Of the 21 IPOs listed in the second quarter, nine are from IT sector and reported an average return of 10.7%. Among the better performing IPOs over the period, we see Afterpay Holdings Ltd (ASX: AFY) delivering 100% since its listing in May, 2016 (as of August 04, 2016). Among the larger IPOs, software company Wise Tech Global (ASX: WTC) had jumped 33.4% after its listing on ASX (as of August 04, 2016).
Amount raised as per sector (Source: OnMarket Bookbuilds)
Growing participation from retail investors: Retails investors are investing in market through IPO or mutual fund routes. The demand from retail investors is also helping prices to move up and get better return on IPO prices. Moreover, several companies now offer their stocks directly on digital platform with minimum investment. Apps and portal are now available to retail investors for directly applying for IPOs, helping them to increase their participation in IPOs.
Improving attractiveness: The outperformance of IPO market indicates for quality of companies listing on the ASX that offer great potential for investors who are constantly looking for investments opportunities in other sectors apart from resources segment. Going forward, IPO pipeline includes assets such as The Good Guys, Autosport Group and Inghams putting efforts for listings over the next few months. As per Delloit 2016 update report, it is expected to have more of REIT listings with an estimated value of $3 billion coming to the market during the remainder of 2016 and even in 2017, as yields are better than any other asset class amidst global uncertainty. Another boost may come from the fact that at the time of IPO, companies are generally advised by their advisors to under promise but over deliver on prospectus forecast. This also helps in winning investors’ confidence and rise in share prices. Although, the market performance is good indicator for investment, however timing the market as well as investing in fundamentally strong IPOs with good industry prospects remains the key for investment. Moreover, the tightening regulations from ASX on IPOs is regaining investors’ confidence on IPOs as they now come with a better transparency.