24 Sep 2020
There’s something similar but very different happening in Australia, where about $10 billion of floats are planned by the end of the year. Four companies floated this week, the largest of which was TV captioning group Ai-Media, which listed with a market value of $177 million.
While there are few big IPOs on the starting blocks – data analytics firm Nuix and the Dalrymple Bay coal terminal, both of which will be valued about $1.5 billion, and law firm HWL Ebsworth – Australia’s is mainly a float rush writ small, as an army of largely tech-focused companies try to leap through the IPO window.
These include Adore Beauty, BikeExchange, Plenti (formally known as RateSetter), non-bank lender Harmoney, online lender Lendi, and Drug development outfit Clarity Pharmaceuticals.
Deal markets and investors argue there are key factors at play for both large and small raisings.
The first is that the Australian economy seems to be bouncing back from the COVID-19 dislocation faster than expected, meaning the IPO window has opened at an earlier stage than in previous recoveries.
Ultra-low interest rates, which has led to capital flooding into equity markets and pushed valuations to historically high levels, have also helped. In theory, at least, companies just joining the market are valued at a discount to established listed peers.
But the bigger factor is a hunt for growth.
Bell Potter’s veteran equity capital markets boss Hugh Robertson argues investors are reasoning traditional Australian blue chips such as banks and industrial companies will struggle to grow in a fragile post-COVID-19 economy, and instead will look to companies that can grow irrespective of economic conditions.
That leads you straight to tech companies – and everyone wants to be one, or at least sound like one.
Even HWL Ebsworth borrows software sector terms in its documentation, describing itself as a “disrupter” in the commercial legal industry, and putting its “total addressable market” at $15.4 billion.
But given the sky-high valuations of established names like Afterpay, the real hotspot on the ASX is among smaller tech firms.
Dean Fergie, portfolio manager at small-cap specialist Cyan Investment Management, believes it is retail traders – recently dubbed the Robinhood set – who have led a charge into the small end of the market, leading to the ASX Emerging Companies Index soaring 87 per cent in the last six months.
The broader ASX 200 is up 18.7 per cent by comparison. Institutions desperate to generate returns in a difficult year have followed the retail investors down to this end of the market.
Robertson says investors assessing floats are prioritising the quality of management, even over valuation.
But Fergie’s not so sure. “I don’t think people are looking that hard at management or valuations or even quality of business. They’re just thinking, is this price going to be higher in a month’s time?”
Fergie says the number of ASX announcements from smaller companies that seem mainly designed to keep the momentum in a stock has become a running joke.
He now does what he calls the dollar sign test – if the announcement doesn’t include actual dollar figures, it’s probably fluff.
Given these market conditions, the quality of floats, particularly at the smaller end, will be variable – which is of course always a feature of any IPO rush.
“The market is paying big numbers for lots of businesses that have got lots of potential and not much reality, so why wouldn’t you have a go?” Fergie says.
Still, deal makers say that’s also exciting.
Yes, Australia’s small venture capital market means some tech companies come to the ASX earlier than they might in the US. But the floats this time around aren’t tired businesses the founders want to offload, but businesses that have been flying below the radar and developing genuinely interesting technology and business models.
But as always with floats, it’s very much buyer beware.