How to assess IPO opportunities
When share markets are on an upward trajectory companies that require capital to grow often consider it a good time to ‘go public’ or list on a stock market such as the Australian Securities Exchange (ASX).
The ASX has been in positive territory this year as markets respond to improving global economic conditions.
Over the past year the All Ordinaries has travelled
from about 5200 points to 5800 points. Economists expect
US GDP growth to reach 2.1% by the end of the quarter.
These conditions are often those considered suitable for raising capital from investors.
The ASX’s list
of upcoming floats backs this up. At time of writing 29 floats were listed for the remainder of 2017, across sectors such as biotechnology, technology and mining, as well as many others.
It’s a good idea for self-managed super fund (SMSF) trustees to gain an appreciation for how IPOs can add value to a portfolio’s total worth. It’s also extremely important to understand the often-high risks of investing in companies that have not raised money in the public markets before.
Mark Borg, principal of MBA Financial Strategists says when it comes to assessing an IPO’s bona fides, one of the best places to start is its prospectus.
In particular, this should give SMSF investors substantial clues about the suitability of the management team to run a newly-listed venture.
Borg suggests some of the critical sections to consider in a prospectus include information about the type of business the company is in and the experience of the management team have in this space.
Look for a mix of experienced managers and investors, as well as people with subject matter expertise in the area. Ideally the management team will have prior experience bringing a business to market.
“Also look at which other companies own shares in the business. Having one or more large reputable companies on a share register can be seen as an endorsement of the company,” he explains.
Devil in the detail
Prospectus documents are usually split into a glossy marketing section at the start of the document and a longer section at the back that contains most of the important details about the offer.
The marketing pages should be an easy-to-read run through of the business, why it wants to go public and the details of the offer including the number of shares on issue and the price per unit.
Following this section should be detailed descriptions of the management team and their background. This section should also include full financial information including evidence-based justifications for the basis of any claims the business is making about future financial projections.
Borg says it’s essential to gain a full picture of how much revenue the business will need to generate to make money.
“It’s not so much about getting behind the fine print as it is about understanding the business the company is in. If you do not understand the company and how it intends to make money than do not invest in it,” he advises.
It’s also important to consider how the money raised will be harnessed.
“Investors should also understand how the executives are remunerated and their shareholding pre- and post-listing. Having your holding overly diluted due to success or having the executives sell all of their existing holdings are warning signs for investors,” he says.
Behind the numbers
Outside the prospectus there is a range of avenues SMSF investors can follow to understand if the business has a good chance of growing profits in the future.
Says Borg: “Some research houses and stock brokers provide research into IPOs. It is important for most people to work with a professional who can help them understand the business and risk that such investments may afford.”
As he notes, IPOs are a riskier investment. “So first assess the portion of your capital you wish to expose to this level of risk. Working with experts will assist in understanding the appropriate amount of the portfolio to expose to this area and how best to mitigate risk.”
IPOs do have the potential to add value to an SMSF’s portfolio. But it’s essential to understand the true risk/reward profile of the company before allocating any money to it.