Small companies set to drive IPO market again in 2011

Small companies are expected to drive Australia’s IPO market again in 2011, after accounting for almost 90% of all floats on the ASX in 2010.

According to a new report from accounting firm HLB Mann Judd, Australia’s total IPO market bounced back strongly from the GFC in 2010, with the number of new listings climbing from 39 to 96, and the total amount raised doubling to $6.1 billion.

The number of listings during the year was greatly boosted by the successful float of rail giant QR National, which raised just over $4 billion in late November.

A flurry of listings followed the QR float. The report shows that in December alone, 33 companies – or 34% of the total number of floats – hit the boards.

While December is always a big month for companies looking to float – this is partly a timing issue, as companies know they will have to revise their documentation if they don’t float by the end of the year – HLB corporate finance partner Geoff Webster says the giant rail float was a confidence booster.

“I think QR National really did really put a positive spin on the market,” Webster told SmartCompany.

“Apparently a lot of the investors in QR came from overseas. Maybe the locals said, ‘Well, we missed out on that one’ and that sparked the interest in the new floats at the end of the year.”

The number of small cap companies climbed 133% during 2010, with the average level of funds climbing from $7.47 million to $9.07 million.

Even more impressive was the performance of these small caps. On average, their share prices jumped 14% on the first day or trade, and were 46% higher at the end of the year.

“There have been spectacular results,” Webster says, pointing out that the overall sharemarket actually fell during the year.

He says these results are helping to make new floats more attractive for investors.

“People look at their funds and realise they haven’t made any money, so they start trying to spice up their portfolio.”

Almost two-thirds of the small-cap floats came from the mining sector, which always dominate the IPO market and typically get good support from a network of specialist investors and brokers.

Webster expects these investors will be active again in 2011, provided they can find the right IPOs to support.

“The resource sector has always been a substantial part of the IPO activity. But certainly if you look at the growth that is coming into this year is being driven by the resources sector. Even the non-resources companies that are coming to market are related to the sector, such as drilling services companies.”

“If investors see a company with good management – that’s probably the bellwether – then that’s probably indicative of a company with good prospects.”

Another trend likely to continue into 2011 is the use of dual-track processes – where a company prepares for a float or a trade sale at the same time.

Webster says current market conditions mean many companies feel they cannot achieve the sort of multiple they want through a float, and so remain open to takeover by a trade buyer.

He says the key for a company that wants to float in 2011 is a strong story that investors can understand and support.

“Anybody who is going to market has got to have a track record, or they’ve got to have a position in the market – a brand, a clear value proposition, a point of difference.

“And when investors see where the money is going, they want to see it’s staying in the business and being used for growth, rather than providing an exit strategy for the founders.”