Summary:
Not all IPOs and Capital Raisings are created equal…
However, we believe this way of thinking warrants caution since not all IPOs and Capital Raisings are created equal. In our opinion the vast majority should be avoided due to their lack of track record and evidence of sustainable moats, and their often unproven business models. We have previously written about our high quality shopping list, and we find the majority of IPO and Capital Raising opportunities fail to meet our criteria of a high quality investment.
We recently saw a cautionary tale when it comes to IPOs, as covered on The Lazy Dog blog.
STOCK EXAMPLE: Zenitas (ASX:ZNT) is a good example of a recent Capital Raising which ticks all our high quality boxes. ZNT now operates from 54 locations throughout Australia, employing 700+ health professionals, providing services across allied health, home care and primary care; making it a significant player in the community healthcare in the Australian market. Community healthcare is expected to benefit from supportive government policy, as community-based health services represent a cost effective solution compared to high cost hospital care. We like ZNT as it is in a sector supported by strong tailwinds and encouraging thematics, it is priced on an undemanding multiple, has multiple and credible pathways to grow, and is run by an experienced management team. That said, the business still has work to do prove itself to the market, and to build out its model. As it does, there is ample room for the share price to re-rate.
Once you have identified the right ones – how to gain access?
At this point it is worth mentioning that the IPO market largely remains under the control of the larger brokers who still generate very high fees for handling IPOs. So the main route to IPO or Capital Raising stock supply is through the broking community.
For smaller investors this means leveraging existing broker relationships, and showing yourself as a potential longer term client for that broker rather than an “IPO flipper”. If an IPO is in hot demand brokers will be very focused on the clients they believe will help build their business longer term rather than short term focused traders.
This is one of the areas where it is a major advantage to be invested through a long term focused smaller companies investment manager since these funds tend to move to the front of the queue for the reasons mentioned.
STOCK EXAMPLE: In the above mentioned example of Zenitas (ASX:ZNT), there was no public float or ability for retail investors to participate. And even sophisticated investors had their bids substantially scaled. However, we were able to use our existing relationship with the company through our long term shareholding in BGD Corporation to secure a strong allocation.
What is being done about it by the ASX?
Alternative strategy to gain access to IPOs: Onmarket Bookbuilds
We hope these bookbuilding models succeed in building their business longer term as their success will lead to greater access to the higher quality IPOs which remain largely inaccessible for retail investors at present. And hopefully other alternative access points for retail investors will emerge in the coming years.