Australian small cap investors have an unprecedented opportunity to gain exposure to new company floats, according to small companies specialist OC Funds Management (OC). At its September investor briefing, OC Head of Investments Rob Frost highlighted that the concentration of Initial Public Offerings (IPOs) seeking to list in the final stretch of 2020 was probably the highest he has witnessed in his nearly 20 years at OC.
Following a stronger-than-expected results period and with equity markets buoyant, the window of opportunity has opened for companies planning an ASX listing. In September alone, the small companies fund manager has seen over 20 prospective IPOs, some as part of a formalised IPO process and others at a more preliminary Non-Deal Roadshow (NDR) stage. “One broker that we know of has a pipeline of up to 18 IPOs to bring to market over the balance of the calendar year”, said Rob.
Some examples of smaller IPOs exploring an ASX listing (outside of the top 100 listed companies) include $1 billion-plus businesses such as software platform Nuix, and infrastructure asset Dalrymple Bay Coal Terminal. At the micro-cap end of the market, companies such as mydeal.com.au and Aussie Broadband are also making a run at the ASX boards.
In the investor briefing, Rob highlighted that the process companies go through prior to listing often involves an NDR consultation with select fund managers on detailed aspects of the deal. Following these initial fund manager meetings, which typically explore the business model and growth strategy and provide scant (if any) financial information, the key stakeholders of the prospective listing may thereafter move toward a more formalised roadshow with the intention of listing on the ASX.
Rob noted that “the opportunity to be heavily engaged early in the IPO process gives OC an opportunity to meet with key management, understand the business model and the growth strategy of the company prior to a more formalised roadshow presentation, where we delve into the financial details. At this earlier stage we offer feedback on whether it is the type of business that, subject to valuation, we might be interested in becoming a shareholder in.”
Not all proposed IPOs will make it to the ASX bourse, nor will all the consulted fund managers ultimately decide to invest in each opportunity they review. “We kiss a lot of frogs”, said Rob. “But we have already seen some quality businesses and the IPO process offers an opportunity to invest in companies that haven’t yet been efficiently priced by the broader market. Therefore, if we do our job well, we can add alpha for our clients by investing in IPOs which subsequently come onto the ASX at a premium.”
OC is one of Australia’s longest running small cap fund managers and is distributed by Copia Investment Partners.