NAOS recently attended a US venture capital conference which was attended by some of the leading & most well capitalised US and European companies of the future. It was interesting hearing from some of the CEOs as well as industry experts about what the path to IPO entails including what that path may look like on the ASX. Today, companies are staying private for longer, the average age of companies that went public in 2014 was 11yrs vs 4ys in 1999. Much of the growth in dollars invested in venture capital over the past 12 months has been driven by the continual flow of capital to the bigger ‘unicorn’ deals, whilst (according to the NVCA) the percentage of funds going into first time deals is only 15%.
So how does this relate to Australia? With capital concentrating towards fewer larger deals & those companies staying private longer, more and more smaller, less mature companies will need to raise public equity earlier & the ASX scores well on an ‘early stage public equity report card’ we have a look at the positives here;
#1 - Unlike US & numerous European markets, the ASX faces relatively minimal competition from other exchanges. Listing in a country with one exchange gives you the highest likelihood of finding comparables within that market & creates ease of use for investors.
#2 - An underwriter is not compulsory to list on the ASX which means no bank or institution needs to take the risk to guarantee your float. This can often prove hard to secure at the best of times let alone as a higher risk early stage technology company.
#3 – Minimal financial requirements are needed including no requirement to be profitable. This obviously suits any company with a high growth strategy. Compare this to other Asian exchanges & the NASDAQ where 3-year profit hurdles are necessary.
#4 – If choosing the commonly used path of a re-compliance listing from a reverse takeover the cost of a shell company can be $1-2 million dollars. Compare that to some recent shell company transactions in China which sold for $40-60 million dollars & other exchanges where shell company listings are not possible.
#5 – Requirements to obtain an index weighting are low compared to valuations of private tech companies. The lower end of the ASX200 Index sees a market cap of $500m with average trading volumes of less than 500,000 shares. If achieved a natural buying process can occur from index funds and liquidity improvements can be beneficial. This should drive share price increases, investor awareness & analyst coverage over time. By comparison both the NASDAQ & the TOPIX (Tokyo) have over 1,000 companies with market caps greater than $500m meaning it can be very easily to ‘get lost’ as a smaller company.
#6 – One size fits all. We would argue that for point of comparisons to existing ASX listings, tech companies tend to be grouped together as a sector rather than segmenting into specific industry groups. Generally speaking, SAAS business model software companies all seem to be compared to one another regardless of underlying industry fundamentals which they individually operate in. Furthermore, analysts tend to be ‘tech generalists’ rather than industry specialists which seems to suit the ASX market well and can provide for a quick adoption process amongst investors. This is a favourable mindset for IPO hopefuls as there is already a predefined ‘basket’ of stocks to benchmark against.
#7 – A relatively small venture capital industry in Australia means public equity markets are a replacement source of funding. Whilst there are some high-quality venture funds in Australia, public markets have become comfortable with early stage technology investing.
There are many other considerations both positive and negative, however from a high level the characteristics of the ASX environment, coupled with the overseas venture capital funds focus on larger deals, gives us confidence that we will continue to see many more IPO technology companies coming across our desk, companies of quality and companies of poor quality which go public too early, overpromise and perform very poorly. When it comes to tech IPO hopeful’s investors need to ask themselves: Why is this company attempting to list now? & What other funding alternatives (if any) did they have?
NAOS believe ‘it is impossible to produce a superior return unless you do something different to the majority’, we find quality companies at attractive values and apply a patient, high conviction and often a contrarian investment approach to...