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Hunger for capital to drive Aussie IPO market

Hunger for capital to drive Aussie IPO market

Increasing demand from foreign companies for Asia-Pacific’s second-largest capital pool is expected to drive the IPO market in Australia this year.

The Australian share market is expected to see a stronger year for initial public offerings (IPOs) in 2017 compared with 2016, as foreigners seek to tap into the country's established pools of capital, according to business and financial advisers HLB Mann Judd.

An IPO is the first time shares in a private company are offered for sale to the public. These companies seek to raise additional cash for various reasons, often to fund business expansion.

Investors’ hunger for capital has seen an increasing number of overseas businesses, “not just from Asia but from everywhere”, exploring ways to list on the Australian Securities Exchange (ASX), said Jude Lau, partner at HLB Mann Judd Melbourne.

Succession planning, as well as growing interests to convert assets into cash by selling down stakes, are also some of the key drivers that will support the IPO market, he said.

“For the Chinese ones, what we’ve observed is that most of them want to be listed on the main board [of a stock exchange],” said Lau. “Within the region which they operate from – China – there are some restrictions about the number of companies admitted to the Main Board.”

For example, the stock exchange in Hong Kong operates two markets, namely the Main Board and the Growth Enterprise Market (GEM). While the listing requirements for both markets are largely in line, the rules for a Main Board listing are more stringent, the exchange operator said on its website.

A listing on the GEM might not get the exposure they could otherwise from a Main Board listing, Lau pointed out, prompting companies to explore alternatives elsewhere, such as in Australia.

Superannuation assets

Backed by its established superannuation system, Australia’s pension fund assets reached a record $2.15 trillion at the end of September 2016, according to the latest statistics from the Association of Superannuation Funds of Australia (ASFA). Over a year to September 2016, total superannuation assets grew 7.4%.

ASFA said these assets could grow to as much as $3.5 trillion by 2020, based on consensus private sector forecast.

The Global Pension Assets Study 2017 report, which covered 22 major pension markets, stated that Australia’s total pension assets stood at US$1.58 trillion at the end of 2016, the second largest in Asia-Pacific and fourth largest in the world.

In terms of asset allocations, the study found that Australia, alongside the US and UK, had higher allocations to equities than Canada, Japan, the Netherlands and Switzerland. Assets in these seven countries collectively accounted for 91.7% of total pension assets.

Materials stock sales

The S&P/ASX 200 index increased 0.8% in the first two months of 2017 – underpinned by higher commodity prices and healthy economic growth and corporate earnings – compared to a 7.8% loss in the same period last year.

Marcus Ohm, partner at HLB Mann Judd Perth and author of the IPO Watch Australia report published in January 2017, noted recovery in the materials sector in terms of the number of upcoming IPOs.

As of 1 March, a total of 38 companies have announced their IPO plans for this year, 18 of which have been priced and are waiting to trade on the ASX, according to Bloomberg data. Of the total, 20 belong to the materials sector.

“A significant proportion of these are focused on lithium and cobalt, a sign of the continuing push for materials used in the creation of energy cells,” said Ohm.

Materials stocks gained 43% over 12 months to 28 February, the best-performing sector in the ASX 200, according to Bloomberg data. The ASX 200 was up 17% over the same period.

On how US President Donald Trump’s policies might affect markets, Lau said: “There has always been some degree of skepticism about Donald Trump. Across my client base, they still have a degree of reservation.

“But ultimately though, if what he does is good for business, business sentiment will be good. It’s how he handles the politics of it. The two of them go hand in hand and they are not mutually exclusive. If it’s done in a way that perhaps is the opposite of what he describes, it may create some angst, and that’s one thing that we don’t know.”

2016 overview

The number of IPOs totalled 94 last year with a combined $7.5 billion raised. That compared to 85 in 2015 ($7.02 billion), according to the IPO Watch report1.

Of the new floats last year, 83% met their funding targets compared to 68% in 2015 and 65% in 2014, the report showed.

“In addition, we are starting to see a good balance of newly listed companies in terms of both market capitalisations and sector representation, which is a very healthy sign,” said Ohm.

IPOs fared better than the broader market in 2016, with newcomers posting an average share price gain of 16% above their listing price, versus a 7% increase in the ASX 200, Ohm added.

1All data in the IPO Watch report excludes property trusts.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. The inclusion of companies in this article does not constitute a recommendation and it’s vital to remember that the value of shares in any company can fall as well as rise, which means you could lose money by investing in them. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. The commentary provided from external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. Neither Commonwealth Securities Limited nor members of the CBA Group accept any liability for losses or damage arising from any reliance on external companies and their products, services and material. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.