What Investors Should Consider Before Investing in an IPO

What Investors Should Consider Before Investing in an IPO

2015 was an impressive year for Australian IPOs, with an average share price increase of 23.8% between the 97 IPOs that made their debut – compared with a 2.1% decline for the ASX 200. By the end of the year, over 60% of IPOs closed equal to or above their listing price.

With this strength however, it is often difficult to secure an allotment within an IPO. With that said, here are four fundamental insights to help you successfully navigate your way through the IPO landscape. Also, you will find information on how you can access some of the more popular upcoming IPO opportunities.

1. Establish your investment strategy:

Despite IPOs having performed well in recent years, they are by no means a risk-free investment. In fact, they lack the trading history associated with publicly traded companies. Given the lack of coverage available, investors are more reliant upon the company’s prospectus.

When this turns out to be understated, things can go extremely well – as in the case of Bellamy’s (BAL) and BWX Ltd (BWX). On the contrary, when companies fail to live up to the market’s expectations, they are punished – like Myer (MYR) and McGrath Ltd (MEA).

Understand your rationale for pursuing any given IPO. What is your risk appetite? Do you have a particular investment horizon? That is, are you looking for a long-term growth opportunity, or are you hoping to take advantage of a first-day profit? Each IPO will involve varying degrees of risk, making it crucial to pursue one that aligns with your investment strategy.

2. Be selective in finding the right opportunity:

Finding the right opportunity involves staying abreast of the latest news. At IPO Society, we monitor these opportunities daily, and also track publications like the ‘Australian Financial Review’ and ‘The Australian’. As an investor however, you need to filter out the ‘spin’ and concentrate on the fundamental sale.

Establish who is selling their stake in the company, and why? Is Private Equity involved in selling their stake? Notwithstanding the collapse of Dick Smith (DSE), the performance of Private Equity IPOs hasn’t been as bad as the negative publicity suggests – in fact, they achieved a 47.6% return between 2013-15.

There is however, a heightened level of caution around Private Equity IPOs, which could damper investor demand. Positive signs include owners or senior management who are looking to maintain (or even increase upon) a notable stake within the company once it is floated. Gauge the level of interest and subscription in the float, which may help you understand potential demand once the stock lists.

Another aspect to consider is the level of broker support. Some brokers have a better history with IPOs than others, making them more selective about what they endorse. The implication of this however, is that sought after opportunities are typically restricted to fund managers or premium customers.

3. Conduct your due diligence to understand the IPO:

Once you think you’ve found the right opportunity, conduct your due diligence. While the prospectus does serve as a marketing piece, you should pay close attention to the company’s financial health.

In deciding to list, the company is asking for additional money to fund their business. As such, it is crucial to appraise where this money is going to be used. Ideally, this money should help the business grow, rather than pay debt. Remain mindful though, some growth avenues like R&D may take considerable time to realise returns.

Understanding the environment within which the company operates is paramount, not only to appreciate the dynamics of the sector, but to gauge how the prospective company’s valuation aligns with other industry participants.

Another aspect of the float that should not be overlooked is the company’s management, as their skills, experience and reputation are the lifeblood of the company. Investors should be familiar with how their payment and performance bonuses are structured, as well as any options or escrow arrangements.

Ultimately, never invest in a business you don’t fully understand. If you’re left with more questions than answers, it’s usually a sign to save your money for another day.

4. Establish access to the opportunity:

Being able to find the right broker, or other means of participating in IPOs, is invaluable – not only to source and discuss opportunities, but to understand the current dynamics of the IPO market.

At IPO Society, we work with the top investment banks and brokers to source upcoming IPO opportunities and capital raisings for everyday investors.

Allotments in many IPOs are reserved for fund managers and clients of the listing broker. Our access to these institutions means we can act as an intermediary between investors and IPO companies. We also provide members with audited financial statements and research to make your investment decisions easier.

Join IPO Society to receive invitations to participate in upcoming IPO opportunities, research and news.

The team at

IPO Society

The information contained on this website in no way reflects the opinions of IPO Society. It is provided for informational services only. It does not constitute an offer to sell or a solicitation to buy any security or other financial instrument. The information is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. Detailed information may be needed to make an investment decision, for example: financial statements; a business plan; information about ownership of intellectual or industrial property; or expert opinions including valuations or auditors’ reports. The information contained on this website is not intended to be the only information on which an investment decision is made and is not a substitute for a disclosure document, product disclosure statement or any other notice that may be required under the Act, as the Act may apply to the investment.

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What Investors Should Consider Before Investing in an IPO
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