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By Jonathan Shapiro and Sarah Thompson 09 Dec 2018 — 11:00 PM
Investors in this year's initial public offerings and share placements are nursing double-digit losses after a year of shame for the stockbroking industry that threatens to derail floats well into 2019.
Share price declines of the two largest listings – Coronado Coal and Viva Energy – have contributed to an average decline of 30 per cent for the six largest new offers of the year. Meanwhile, investors that participated in $100 million share placements by Blue Sky Alternative Investments and RCR Tomlinson have lost almost all of their capital.
"We are coming towards the end of a bull market," said Atlas Funds Management chief investment officer Hugh Dive.
"The good ideas – such as Costa Group and Reliance – were floated a couple of years ago, and now we are seeing less attractive opportunities."
Shares in Viva Energy, which raised $2.7 billion in July, have fallen 20 per cent while Coronado Global Resources, the coal play that raised $1.4 billion in October, has fallen 24 per cent. The $580 million listed pub group Redcape has traded down by 6.2 per cent since floating last month.
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"A lot of businesses are raising capital for the wrong reasons, such as cashing out existing shareholders," Sebastian Evans of small cap fund manager NAOS Investments told The Australian Financial Review.
Mr Evans said there was little sign that the quality of new offers would improve to the point that they would make attractive investments relative to companies that already trade on the exchange.
"We have some stocks trading on single digit price-earnings ratios – how is it compelling to list a company on a 15 to 16 times multiple, that is not a proven format?"
He said there were too many companies coming to market that had no reason to list on the exchange, and that was resulting in poor quality investment opportunities.
"A lot of companies struggle with being public – such as meeting guidance, being transparent and meeting investors. Most are not good at it."
While the stockmarket has traded broadly flat since the start of the year, investors have been left disappointed by underperforming floats.
They include Smiles Inclusive, a listing of dental practices, which has fallen nearly 70 per cent since it listed in April.
"Two dental roll-ups have come to market and didn't work. And they came with a third and said this one was different," one fund manager said.
A recurring debate is whether fund managers that buy the deals, or brokers that bring them, should bear responsibility for lacklustre floats.
"We are all adults. The job of stockbrokers is to raise capital. It is investor's job to work out of it's very good or not," said Mr Dive.
Another poorly performing float was the listing of Evans Dixon Group, which was formed as a result of a merger between two wealth managers – Evans & Partners and Dixon Advisory.
The shares were sold to clients of each of the respective firms but have declined by nearly 30 per cent since the April float.
Meanwhile, it is becoming harder to convince institutional investors to participate in new floats.
One large fund manager said there were broader issues than just the quality of the businesses.
"Price expectations have been problematic. The so called 'IPO discount' – to adjust for the risk and uncertainty – has disappeared, and a lot of blue sky has been price in priced in."
The fund manager said that since a large portion of IPOs are brought to market by financial sponsors, such as private equity, it led to unrealistic price expectations, overhangs and subsequent sell-downs. Usually private equity vendors retain a stake in the business they are selling as a show of faith, but this can weigh on the share price (an overhang) as potential buyers wait until the sell-down to get in.
UBS managing director and co-head of equity markets Andrew Stevens said there was "no doubt investors are becoming more selective."
"The days of the big IPO that investors are forced to own is gone," Mr Stevens told the Financial Review. "There is a degree of scepticism about IPOs particularly from private equity."
While the year has been a challenging one, large companies such as Transurban and Woodside Petroleum have managed to raise billions of dollars of capital, and bankers say support is available for the right deals.
In addition to struggling floats, several IPOs have been shelved after failing to attract sufficient interest. This included a $1.5 billion share sale by consumer finance company Latitude Financial.
One of the most controversial offerings of 2018 was the of small business lender Prospa. In June, the $146.5 million raising was pulled at the last minute as the deal underwriters became skittish after regulators requested information about its lending contracts.
Ironically, Prospa is said to be tracking well ahead of its prospectus earnings targets that would have made it a rare success during the year.
Investors have not only been punished for backing floats. Several large share placements have also resulted in large losses. These include Blue Sky Alternative Investments which raised $100 million in March, weeks before it became the victim of a short-selling campaign and its share price fell over 90 per cent.
Meanwhile, RCR Tomlinson raised $100 million in August, also just three months before it was placed in administration.
Even investors that backed floats in the high-flying technology sector have been left underwhelmed. Shares in Raiz, the popular micro investing app,which raised $15.1 million in May, are down almost 70 per cent.
The transaction was controversial because $2 million of the proceeds were distributed to staff, including a $1 million bonus to the chief executive. Shares in Trimantium Growth Ops, a roll-up of technology service related companies that floated in January, have also declined by over 30 per cent.
The most recent initial public offering, Redcape Hotel Group, has also traded lower by 6.2 per cent in its first five days of trading.
In addition to investor scepticism, heightened market volatility amid rising tensions between China and the US, and tightening US monetary policy, is set to further delay fundraising plans.
"What we have seen in markets recently is a bigger change than anything we have seen for some time," UBS' Mr Stevens said.
Important Information: This material has been prepared by NAOS Asset Management Limited (ABN 23 107 624 126, AFSL 273529 and is provided for general information purposes only and must not be construed as investment advice. It does not take into account the investment objectives, financial situation or needs of any particular investor. Before making an investment decision, investors should consider obtaining professional investment advice that is tailored to their specific circumstances.
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