Not always a ball for local debutants

Investors are hungry for IPOs but there are highs and lows, writes Max Mason.

Investors are hungry for IPOs but there are highs and lows, writes Max Mason.

The appetite for new investments may be growing, but this week's sharemarket debutants have left investors going hungry. With names like Nine Entertainment and Dick Smith Electronics hitting the market, investors' response has been lacklustre.

Shares in Nine fell 3.4 per cent, from $2.10 to $1.98, on their first day of listing, while Dick Smith has risen 1.8 per cent, from its listing price of $2.20, to $2.24 this week.

The lack of enthusiasm for the bigger names was also reflected in a lot of smaller listings, including LifeHeathcare and PS&C, which traded relatively flat, at $2.01 and $1, respectively.

However, proof that the market is hungry for new investments came from credit services group Veda, whose share price rose 54 per cent from its float price of $1.25 to $1.925.

"There has been a global recovery in markets and IPOs and, in Australia it has been particularly notable in the last three months," ASX general manager, listing and issuer services, Max Cunningham, said. "Aside from market confidence, the standout aspects of this IPO recovery has been limited issuance of equity and high levels of retention by the vendors."

During this cycle of IPOs, there has been a diverse range of companies listing, which is different to previous cycles which have been dominated by the resources and consumer sectors.

The flurry of IPOs is a reflection of Australia's strong equity market over the past 18 months but fund managers caution against jumping into something fresh just because it is flavour of the month.

"Quite clearly, private equity have found a good window to exit positions they've been setting up for a number of years. That seems to be the theme dominating," said George Boubouras, Equity Trustees' chief investment officer.

Private equity firms looking to completely sell down their stake in new companies should ring alarm bells immediately; there is a reason they are trying to exit.

"If private equity are existing an asset, I always take the view that they need 'skin in the game' for at least up to three years," Mr Boubouras said.

"That aligns everyone's interest for at least half a cycle, so three years is an appropriate time for private equity to remain exposed to some capacity."

Despite most of this week's new listings not being runaway successes, investors can take solace in the fact that shares have roughly held their ground.

Nine Entertainment's listing on Friday marked the 88th addition to the ASX this calendar year, and the 48th this financial year.

Despite the flux of companies entering the market, IPOs are well off their peak, especially the micro-caps.

"You need to keep it in perspective," Acorn Capital portfolio manager Paul Palumbo said.

"About $1.5 billion has been raised in the IPO market this year for micros, versus around $5 billion in 2007, so it's still a long way away from peak times."

Mr Palumbo said there were some real opportunities for investors with a mix of quality companies, but also some undesirables. The IPO market this time has been characterised by a more opportunistic or entrepreneurial feel, he said. "From all the soundings we're getting from our broker network, that will continue very strongly next year.

"The market has certainly been active, it's been the most active since the global financial crisis but it's coming off an extremely low base. There's been no new issue, no IPO market for four to five years, so you'd expect that pipeline is very full and subject to stable markets, they're all going to come on."

Coming under focus will be this month's $1.7 billion float of packaging company Pact Group.

Pact plans to raise $649 million through the issue of 170.7 million shares at $3.80 a share.

Pact, which is scheduled to list on December 17, is attracting support from investors because of the defensive nature of its food and beverage packaging operations.

Travel insurer Cover-More, owned by private equity, has also said it will join the rush to float before the end of the year. It plans to raise $521.2 million from investors with trading set to commence on Christmas Eve.

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