When Federal Treasurer Jim Chalmers hands down the budget on 14 May, the pressing need for fiscal responsibility is likely to trump spending programs.
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Slow start to IPO pipeline as large caps await market clarity
After a record 2021 that saw 191 initial public offerings (IPOs) in Australia raise more than $12 billion, IPO listings continued their hot pace through the first half of 2022, with 59 new listings by midyear compared with 61 at the same stage in 2021, according to a recent report from HLB Mann Judd. From June, however, the IPO market slowed to a trickle, and at year end a total of 87 companies had raised just $1.1 billion.
“The first half of the year was really solid, and May was when the market started to deteriorate,” according to Marcus Ohm, corporate advisory partner at the accounting group and author of its 2022 IPO Watch Australia report. “There’s no secret as to why,” he said, pointing to ongoing geopolitical and macroeconomic concerns, particularly around rising interest rates and inflation.
The lull in 2022 was largely driven by the absence of large-cap companies coming to the IPO market, with only nine listings from companies with a market capitalisation of more than $100 million. That left small-cap IPOs representing 90 per cent of total listings in the year and more than half of funds raised, a sharp contrast to 2021 and 2020, when they made up 76 and 58 per cent, respectively, of listings.
According to Marcus Ritchie (pictured), CEO of PrimaryMarkets, Australian IPO activity is also in decline due to more systemic shifts, with many companies choosing to stay private rather than list and face increased public scrutiny and red tape.
“With so many new regulations and an uncertain economy, the prospect of going public seems daunting for many businesses,” Ritchie told The Inside Investor, adding he believes that will continue to be the case regardless of macro factors.
High volatility, light pipeline
Just 10 small-cap companies seeking to raise $8 million on average currently making up the 2023 IPO pipeline, and while rumours swirl of a potential Virgin Australia listing that could open the floodgates, investors will likely have to wait until market conditions normalise before a listing of that size eventuates.
The official ASX pipeline consists mostly of small-cap materials companies, including Evergreen Lithium and Tiger Tasman Materials. With strong demand for the metals required for the transition to renewable energy, the sector has been the biggest contributor to new listings for all but one of the past five years, Ohm noted.
“The materials sector continued to record the highest number of new market entrants in 2022, contributing 63 of the 87 listings (72 per cent),” he said.
OnMarket managing director Nick Motteram also noted the tilt in 2022 toward companies in the resources sector that focus on critical minerals, clean energy and base metals. “This reflected rising commodity prices and the increasing demand for battery minerals as investors looked to increase their exposure to the global clean energy transition.”
Among the worst-performing sectors was diversified financials, with just three total listings, all posting a year-end loss of at least 80 per cent, Ohm said. Buy-now-pay-later companies in particular did weakly.
“The worst-performing IPOs were dominated by the fintech sector, including Beforepay falling 86.4 per cent since listing, closely followed by Halo Technologies losing 85.4 per cent in value,” Motteram said.
Private for longer
According to Ritchie, the decline in listings is due in part to a structural change that is seeing companies stay private for longer. “While there are a number of reasons why private companies might be delaying going public, one factor could be the increasing availability of private capital,” he said.
Public companies usually trade at prices multiples higher than private companies, which trade with a liquidity premium. “By investing in pre-IPO and private companies, investors can access a liquidity discount that can multiply their own return if a company goes public in future,” Ritchie said.
He cited a recent boom in so-called unicorn companies, or startups valued at more than $1 billion, many of which have raised large sums of money from private investors such as venture capitalists. “As a result, there’s less pressure on these companies to go public in order to raise funds. That’s bad news for the Australian IPO market, which is now heavily reliant on larger-scale companies and foreign companies for listings.”
