Angus Kennedy (featuring Robert Miller)
Who hasn't daydreamed about nailing that one great IPO? More to the point, who hasn't felt their heart grow gangrenous about missing out on Afterpay when it listed at $1 per share in 2016. Maybe I speak for myself - some of you must have nailed that one. But then the question for you is how to go about doing it again? What is the trick to picking your next big winner?
While no-one can promise a flawless method for identifying winners, certain steps can be taken to put yourself in the best position to separate the quality from the busts. Accordingly, in the third edition of this collection (part one looked at the record year for IPOs in 2020 and part two at IPOs going into 2021) we reached out to three experts (plus a bonus resource) for their IPO playbooks.
Robert Miller, NAOS Asset Management
At NAOS we are particularly cautious when it comes to any IPO - It is rare for us to participate in any.
Our general view is that new shareholders are investing from a position of weakness vs existing shareholders in the sense that you can only learn so much about an IPO from reading a prospectus. For example, it is hard to gain an understanding of company culture, or a company’s ability to consistently deliver results or a track record of capital management.
“An IPO is like a negotiated transaction – the seller chooses when to come public – and it’s unlikely to be a time that’s favourable to you” - Warren Buffett
With the above in mind, when looking at an IPO the first factor we scrutinise in detail is the use of funds as this will likely provide the best insight into the motivations behind the IPO. Is capital being raised to reinvest in the business to improve its competitive advantage? What is the shareholder composition? Is there going to be an insider selldown? If so, why?
In our opinion, regardless of other factors, if we do not believe there is a sound justification for the use of funds in the IPO, we will not participate.
Our investment process remains consistent regardless of whether we are looking at an IPO or a business that has been listed for 50 years. A relative valuation sense check to comparable listed companies is simply not enough to provide a sense of the true value of an IPO company.
On the rare occasions that we would participate in an IPO, we consider it through the lens of being a long-term investment in our portfolio and conduct our analysis accordingly.
Martin Pretty, Equitable Investors
We did not participate in a single IPO in calendar 2020, an outcome we would not have predicted at the beginning of the year (we have invested in one Reverse Takeover). We found great opportunities were presented to provide new capital to companies we already knew well and we prioritised these opportunities over new listings. Key considerations for any raising include:
Dean Fergie, Cyan Asset Management
It’s a very broad question, but beyond the myriad of characteristics we would look for in any investment (our ability to understand the company and industry, its financial history, scalability, valuation, management capability... the list goes on and on) the main question we ask ourselves is, “Why is this business looking to list and what are they doing with the funds they are raising?”
So my advice is go straight to the “Sources and use of funds” section of the prospectus. If a significant proportion of the funds are being used to pay existing shareholders or pay down debt then we don’t think that’s a great look.
We like to see funds staying in the business and being used to expand the business either organically or through a proposed acquisition. That’s a good start.
Our friends at Ophir recently published an extensive guide to approaching an IPO listing. We have summarised the key questions to ask yourself, and we highly encourage you to check out their whole report.
It is a good reminder that every listed company was once at the IPO stage. Whilst it may be a dangerous game trying to find the next Google/Apple/CSL/Amazon/Alibaba from inception, it is important to keep an open mind to companies that are positioned to shake up the current market landscape. There will no doubt be new opportunities to come.
Although valuations continue to get steeper - and not even initial listings are safe from this - following a process to filter out those companies simply looking to cash-out can go a long way to finding your next big winner. Each of our experts follow varying processes, but ultimately IPO-ing for the right reasons and having coherent growth plans for the future should be at the heart of any decision.