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Smaller IPOs outshine larger floats: report

Smaller initial public offerings (IPO) easily outperformed larger IPOs on the Australian Securities Exchange during 2016, while company floats as a sector delivered much better returns than the broader share market, a new report has found.

The OnMarket “2016 IPO Report” revealed IPOs returned an average of 25.4 per cent, more than triple the 7.5 per cent delivered by the benchmark S&P/ASX 200 Index.

Floats raising less than $50 million delivered the best results, returning 32.3 per cent, while those raising more than $50 million returned 14.7 per cent.

“While the conventional wisdom may say, ‘the larger the company, the safer the investment’, companies with offer sizes of less than $50 million were the clear winners last year, gaining an average of 32.3 per cent by the year’s end,” OnMarket BookBuilds chief executive Ben Bucknell said yesterday.

“That is an encouraging statistic for IPO investing.”

The report also found technology company floats were the best performers, with an average gain of 70 per cent by year end.

Other strong-performing sectors were consumer staples, up 37 per cent, and healthcare, up 24.4 per cent.

Some surprising non-performing floats were financials, down an average 8.1 per cent, barely ahead of energy floats, which fell on average 10 per cent, the report found.

Bucknell said he believed smaller IPOs could continue to outperform larger ones, given the way IPOs were priced by sellers.

“Why is it that smaller IPOs are undervalued on float? Perhaps due to the paucity of institutional funds for micro-caps, companies need to underprice in order to attract retail investors,” he said.

“Or perhaps it is that a higher return is needed to offset the higher risk of companies seeking growth capital.”

Bucknell’s outlook for the IPO market in 2017 is bright, given the strong opening to equity markets and the large number of IPOs that were deferred from late 2016.

“We anticipate a strong start,” he said.

“If the commodity rally continues, the number of resource-based IPOs could pick up after a few lean years.

“We also expect that more listed investment companies will come to market in 2017 after a strong 2016, where investors took advantage of their comparatively low cost for diversification.”

During 2016, first-day returns averaged 16.7 per cent for the year’s 96 IPOs, which together raised $8.3 billion in new capital.

The report revealed average first-day returns were 5 per cent higher in 2016 than in 2015, indicating a robust aftermarket for most new floats.

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