Two things holding back Australia’s IPO market

As it stands, 2023 will be remembered as a year when family-owned chemicals distributor Redox was the biggest float. It raised $400 million to dwarf the next largest, Childcare group Nido Education, which picked up $99.2 million. Both are trading underwater.

There were no blockbuster deals, let alone large cap contenders.

Ambitions punted

As always happens, the start of the year brought plenty of talk about potential listings. Big contenders such as airline Virgin Australia, mining consumables business Molycop and freight-forwarder Mondiale VGL appointed bankers, hosted potential investors on non-deal roadshows and talked up float plans.

They’ve all now punted IPO ambitions into next year, to be featured in January’s pipeline stories.

This year’s potential IPO surprises such as Greencross, Foxtel and Chemist Warehouse never got going, while Guzman Y Gomez’s deal (should there be one) is miles away. Data centres developer AirTrunk remains one to watch.

There are two reasons why it has been so quiet: market conditions and price.

All year, investors have waited for interest rate increases to spark a recession in the United States, only for the economy to keep chugging along. Investors are still unsure which way it is headed, and are largely sitting on their hands.

Meanwhile, US bond yields are up about 5 per cent – their highest levels since the global financial crisis – which puts pressure on equity valuations.

That pressure is most keenly felt in small and microcaps, which is the IPO landing zone whether you are in Australia or offshore, and there are bombed-out tiddlers across the market.

In Australia, it has not helped that a lot of former IPOs are trading underwater, left behind or having launched their floats in much friendlier markets. Adore Beauty is the prime example: it listed at $6.75 a share in October 2020 when investors were scrambling for any sort of pandemic winner. Its wheels have not fallen off, but the stock last traded at 92¢.

That combination of poor IPO performance, macroeconomic uncertainty and investors sitting on their hands more generally makes for poor market conditions. The current crop also has to deal with tensions in the Middle East.

Priced to go

The second thing hitting IPOs, and something that listing companies can control, is price.

What investors want – whether it is an IPO, secondary market purchase or equity raising – is cheap stock.

The last time we had such an IPO hiatus, it took a sure thing to help turn green shoots into a full-on floats boom that helped spark more than 900 ASX new faces in the decade since.

That sure thing was consumer credit services group Veda, which was growing like a weed but floated at a decent discount to its listed peers. Its IPO flew out the door, the stock traded strongly, and the company was snapped up at 2½-times the valuation less than three years later.

What’s this year’s sure thing? There hasn’t been one to date and there isn’t that feeling around Cuscal, despite its profit track record and discount to listed peers such as Smartpay and Jack Henry (UK).

Tasmea and Mason Stevens are too small to move the dial.

Until vendors are willing to offer sure things – significantly discounted IPOs – it is hard to see the floats market catching fire again. Market conditions would have to improve considerably, and there is always something to fret about.

So, while bankers are unlikely to say it in next year’s IPO pipeline pieces, price is the one thing that can get any equity capital markets deal moving. Investors love cheap stock – just ask Star Entertainment and Liontown Resources, which dialled up the discounts to get their latest deals away. IPOs need not be any different.