IPO

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IPO market still delivering 12% returns despite volatility ahead

22 March 2017: IPO offerings have remained robust in the second half of 2016, however market sentiment towards 2017 IPOs remains modest.

According to the 2017 Deloitte IPO Report ‘A game of snakes and ladders, IPO offerings have been delivering returns of nearly 12% on a weighted basis to the end of December 2016, outperforming the All Ords which closed up 7% for the year. However, in comparison with prior years, Deloitte notes that performance was relatively subdued amidst increasing volatility.

The report reveals that IPO volumes remained strong last year, with 94 listings finishing just shy of 2015 volumes of 97. Of these 94 IPO listings during 2016 (with a total market capitalisation of $14.5bn and $7.9bn of capital raised), 38 exceeded $75m in market capitalisation, accounting for 89% of all new capital raised.

“Looking forward to the rest of 2017, Deloitte expects the Australian IPO market to remain active, although deals are likely once again, to be weighted towards the smaller end of the market,” said Ian Turner, Deloitte National Leader of Corporate Finance. “Our conversations across the market highlight that investors are increasingly discerning and are expecting to see a demonstrated track record and growth profile beyond just the prospectus forecast period.

“We expect a number of mature companies that delayed listing in 2016 to go public as market conditions improve and greater political certainty emerges,” he said. “Already in these first few months of 2017, we have seen a number of large listed corporates including Origin Energy, Wesfarmers and Fairfax considering spinning-off established, successful business units into separate publicly listed vehicles.

“Although PE activity has been subdued in 2016 following the significant exits over the last few years, there is a reasonable pipeline of assets that are likely to be IPO candidates over the next 12-24 months reflecting the quality of the business and growth opportunities,” he said.

“In the small to mid-cap space, we expect pre-IPO capital raisings to be an increasingly common means of securing capital to expand business scale, invest in new equipment or technologies and improve balance sheet strength prior to listing.”

Investment market advised to monitor China volatility

The Deloitte report shows that 2017 M&A activity is likely to be driven by large corporates who are increasingly taking a ‘back to basics’ approach as evidenced in recent and upcoming demergers.

“Generally the investment market should be buoyed by the positive picture of global growth in 2017,” said Mr Turner. “However, the investment market should also keep in an eye on the current volatility emanating from China, US Federal Reserve tightening, and in Europe.”

Deloitte does not expect Donald Trump’s presidency and fiscal policy to influence Australia’s economy significantly, despite some rattling of the markets if the new US President is successful in imposing a punitive tariff on Chinese imports.

“Technology (TMT), Financials, REITs and Consumer were the dominant sectors in 2016. In terms of performance, this year was very much a mixed bag of winners and losers with volatility looking significantly more pronounced on IPO stocks,” said Tapan Verma, Deloitte Corporate Finance Director.

“Our research shows that TMT alone had 26 listings, which raised $778m in capital, representing 10% of total market issuance.” The TMT sector provided attractive returns to investors, with a weighted average performance since listing of 34.9%.

Strong leadership required to navigate through volatility

The Deloitte report shows that IPOs listed in 2014, 2015 and 2016 have significantly outperformed the wider market.

The Chairman of Stockland and of Autosports Group, Mr Tom Pockett, said to ensure success, Non Executive Directors must be clear on the purpose and reasons for their IPO listing. He suggests that Directors must satisfy themselves that the company has not been ‘dressed up for sale’ and that the long-term earnings expectations are achievable, and also highlighted the importance of conducting extensive legal and accounting reviews. The reputation of the current owners is also a critical factor to consider.

One of Mr Pockett’s tips for success is to ensure existing owners and /or management remained materially involved in the business for a significant period after the IPO in order to allow for normal and orderly succession. “In addition, the first question I would ask any private company considering an IPO is “Why?”. Successful private companies enjoy the comfort of anonymity, however, once listed they are thrust into the limelight with significant personal exposure, not to mention governance complexity. The answer to that question must be clear and unambiguous before a NED can be satisfied there is a sound basis for a successful IPO to take place,” said Mr Pockett.

Other key findings of the Deloitte 2017 IPO Report include:

  • There were 38 larger cap listings (>$75m) in 2016 with an average market capitalisation of $340.3m, which raised a total of $7.4bn in new capital. The weighted average performance for these listings was 10.5% (to Dec 16)
  • The year’s two largest listings were Viva Energy Real Estate Investment Trust (service stations) with a market capitalisation at listing of $1.5bn, and Reliance Worldwide Corporation (plumbing supplies), which listed for $1.3bn. Both saw positive post-listing gains of 9.1% and 28.0% respectively
  • The 56 small cap listings had an average market capitalisation of $27.3m and raised just under $10.0m in capital on average. Despite the small nature of these raisings, performance averaged 20.3% for the small caps, the best share price performance over the last six months
  • On a value weighted basis, Private Equity exits via IPOs were on par with trade sales in 2016, however Deloitte has seen a significant decline in activity from the peak of $7bn in 2014
  • Overall, private equity listings from the start of 2013 have delivered average gains of over 20%
  • The pipeline over the next 12-18 months remains strong with assets including Blackstone’s investment in Ixom, Affinity’s holdings in Velocity Frequent Flyer, Varde and KKR’s investment in GE Money (now Latitude Financial).

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