The world is in an initial public offering (IPO) frenzy led by loss-making social media giant Twitter, which is seeking $US1.6 billion, and should value it at about US$11 billion when it lists soon. Property isn't just hot in Australia. So far in 2013, the US listed real estate investment trusts, or REITs have raised US$4.7 billion.
These companies are going public so their investors, many of whom include private equity funds, can reap massive windfalls. Australia is in the thick of it following the conspicuous success of the big IPOs this year. Shares in IVF specialist Virtus Health (VRT), foreign currency trading outfit OzForex (OFX), and insurance broker Steadfast (SDF), are up 46 per cent, 30 per cent and 39 per cent, respectively.
There has been the notable failure of online insurance comparison site operator iSelect (ISU) whose shares are down 28 per cent on its listing price after it failed to match profit forecasts soon after listing.
But most 2013 IPO activity is proving to be a boon for investors, and as Under the Radar Report's portfolio manager says: "When something's hot, it's hot. There's the flood of money chasing yield stocks, or chasing investment properties in Sydney. If it's going to go off, who wouldn't want to buy an IPO?"
Yes, that's right, if you can get stock. Investors should remember that because of the "hot" nature of the IPO beast, many are blatantly opportunistic, and it really is a case of "buyer beware". There have been regular IPO flops. Many small cap fund managers were badly burned after Queensland-based KFC franchisee Collins Foods listed in August 2001, having raised $200 million at a listing price of $2.50. Its shares soon halved after it failed to meet prospectus forecasts.
Many funds managers still have not forgiven float managers Deutsche Bank and UBS, or private equity firm Pacific Equity Partners (PEP), which sold its 52 per cent stake into the float. It also offloaded huge debt and managed to net a $60 million profit.
One that Radar's portfolio manager says is going to "explode" is Freelancer, the owner and operator of a website designed to allow bidding for professional services. This is very much a case of a lack of supply. Only 30 million shares are being offered of the 436 million that will be on issue when it lists. This is less than 7 per cent.
And then there is Nine Entertainment Mach II - the $600 million sale by the hedge fund owners. We've looked in detail at this offering and it looks reasonably priced. If you're worried about getting stock, don't. This IPO is different from some of the hot prospects above in one important respect: Where's the growth?