In a turnaround from the drought of two or three years
ago, we seem to have found ourselves smack in the middle of a
flood of initial public offerings (IPOs). Craigs Investment
Partners broker Chris Timms explains to Business editor Dene
Mackenzie how to avoid IPO fever.
The many new companies coming to the market is a vote of
confidence in the New Zealand economy and the financial
sector, according to Craigs Investment Partners broker Chris
The market was still small and investors would welcome a
broader range of investment opportunities.''
We also need this to be a viable source of capital for
growing companies, otherwise they will look offshore for
funding or be swallowed up by larger players - rather than
listing locally and sharing the growth with New Zealand
Then again, investors were right to be cautious, he said. It
was no coincidence the surge in IPO activity came at a time
when the market had performed well and the economy was
probably close to peaking in terms of pace or growth.
Last year was the best year for IPO activity for some time,
with nearly $5 billion raised - 10 times the previous year.
That was before the sell-downs from large investors were
considered, including News Ltd selling $800 million of Sky
Television shares and EBOS raising nearly $250 million to
fund a large acquisition, Mr Timms said.
However, $3.6 billion could be attributed to the Government's
partial sell-down of state-owned energy companies.''
This is one reason why the floodgates have opened since
Genesis Energy listed in April. With the prospect of these
electricity behemoths set to swamp investor demand and
dominate the business pages, many IPOs were put on ice until
the path was clear.''
There remained a significant amount of cash available for the
right investment, he said. Despite $7.5 billion of new
capital having been poured into the local market in 2013 for
those new companies and sell-downs of existing companies,
there was still a significant amount of money sitting on the
At the end of 2012, there was more than $115 billion sitting
on deposit with registered banks. As at the end of March this
year, that had increased to nearly $127 billion.''
This suggests there is still likely to be an appetite out
there for future IPOs, as long as the company in question
stacks up as a good-quality investment.''
If our economy remains in good health over the coming period,
we are likely to see the IPO pipeline remain strong.''
For investors, that presented opportunities at a time when
the rest of the market looked highly priced, it having risen
35% over the past two years, excluding dividends, Mr Timms
It would also add some much needed diversity to the local
market, which had been dominated for years by infrastructure
and utility companies with a domestic focus and only moderate
Participating in IPOs could be an important part of an
investment strategy, offering new opportunities at attractive
entry points. But it could also be fraught with risk,
especially during periods of high market sentiment and where
there was a lot of hype surrounding new offerings.
Investors had had a ''decent run'' with the 22 listings seen
since 2009, he said. Most had performed well, with 73% of
them now above their listing prices and an average return of
19.5% on their IPO prices. Summerset had more than doubled
since its 2011 listing, while Z Energy and Meridian Energy
had respectively returned 17% and 25% on their IPO prices.
Not all IPOs had been kind to investors. Mighty River Power
had been the most high-profile underperformer, although when
dividends were included, it was down only 5.6%. The worst
performers were the very small, early stage companies. Energy
Mad was down 74% and Moa Brewing down 67%.
Points for investors
• The characteristics to look for when considering IPOs were
similar to those applying when looking at companies already
listed. A robust balance sheet, a strong market position with
a competitive advantage, growth prospects and high cash
generation were all qualities helping point to a good
• As always, leadership was crucial. The experience and track
record of the management team needed to be considered, as did
the quality of the board to ensure a thorough level of
• One sensible question to ask was who the vendors were and
why they were bringing the company to market. If the company
wanted to expand, the current owners might want to raise new
capital to do so and they might not be selling at all. It was
always a good sign when current owners were keen to hang on
to as much of the business as they could.
• If the current owners were looking to exit, it did not mean
the company was one to avoid, but more scrutiny was
• Private equity sellers were often accused of taking that
approach and many investors immediately became cautious when
hearing a new IPO was coming from a private equity sell-down.
Sometimes the cynicism was appropriate.
• Not all private IPOs ended badly. Ryman Healthcare was
listed in 1999 as part of a private equity sell-down by
Direct Capital. The shares were priced at 27c and they now
trade at about $8.40.
• Another consideration was the way a new company might fit
into a portfolio. There might be a need to reduce other
holdings to make room for it, particularly if there were
existing investments in a similar industry.
• Investors also needed to ensure they had the right balance
of large, established companies and smaller, higher-growth
opportunities, while taking into account the latter carried