There are few transactions in the financial markets that evoke quite as much interest and speculation as Initial Public Offerings (IPOs) and the quote from Taleb below seems to be apt in an era of uncertainty, Marc Ashton writes at www.miningmx.com.
“In science you need to understand the world,” Taleb says. “In business you need others to misunderstand it.”
Over the last 12 months, commodity and technology IPOs have been hitting the headlines daily, and fortunes are being made and lost across the globe.
“Global investors seeking to capitalise on the emerging markets’ growth story have been fuelling stock market rallies and new listings world-wide,” says consulting giant Ernst & Young in its annual IPO report back.
The firm adds: “The lack of exit routes, a shortage of capital-raising opportunities, and numerous IPO postponements since 2007 have led to a growing IPO pipeline worldwide.” Mining and resource related IPOs are expected to be most prominent in places like Brazil, China and Africa but on average there are smaller deal sizes and transaction volumes than the information technology, financial and energy markets.
In the report, Frank Maturo co-head of equity capital markets for the Americas at Bank of America Merrill Lynch, identified Chile, Mexico and Argentina as three countries where he expected IPO activity to rise in the remainder of 2011. Maturo said: “With the commodity markets, growth is being fuelled now by the BRIC countries, especially China, but as economic activity picks up globally, demand will likely be more broad-based. During the recession, mines and plants closed, so commodity supplies fell. Now as demand continues to rise, so should commodity prices and the potential value of commodity-sector IPOs.”
If Facebook is to be the cliffhanger deal for the technology sector in 2011, then without question the commodity sector equivalent will be the listing of Glencore which realised $10bn for its 16.4% stake when it listed in London and Hong Kong.
Despite its hype, Glencore has hardly been a show-stopper: 530p when it listed, it has drifted lower in line with the broader market.
Listings are coming in all shapes and sizes at the moment. “New listings are always goods signs for the small cap market as a coincidental indicator of investor sentiment,” says Keith Mclachlan a small caps analyst at Thebe Securities commenting on the arrival of explorer Kibo Mining plc on the AltX board.
If that is the case, then investor sentiment is still relatively muted. While all indicators are that there has been demand for high profile global listings, small cap shares are still not attracting much in the way of capital. Two weeks after Kibo listed only 19 000 shares had changed hands with a value of less than R9,000. All this speculation leads to an obvious question: Can you make money following IPOs in the South African market?
This is an interesting question and often it comes down to time and place rather than underlying business fundamentals. One study of international IPOs conducted in 2005 found that with a pool of 153 companies between 1990 and 2001 resulted in a return of -32.8% if investors bought and held the shares for a 3-year period. A similar study of 252 stocks listed on the London Stock Exchange between 1991 and 1995 resulted in a return of -21.3%.
The research seems to suggest that pre-IPO hype and buffed up accounts haven’t lived up to expectations. An interesting observation that’s relevant to the mining sector is that companies with assets in different geographies tend to perform better than those focused on single regions.
In a research paper written for the Gordon Institute of Business Science in 2010, MBA student Prabeshan Govindasamy made some interesting observations about the IPO market in South Africa.
After stripping out AltX-related IPOs and de-listings, Govindasamy calculated that there were 229 IPOs from July 1995 to December 2006. Using a buy and hold methodology over a three-year period, the data indicated that IPOs were poor performers with the majority of sectors delivering negative returns. Mining squeaked in with a 0.75% positive return.
Govindasamy concluded: “IPOs significantly underperformed the market. The underperformance was 50% below the market for BHAR (Buy and Hold Abnormal Return) and 47% below the market for CAR (Cumulative Abnormal Return).”
With IPOs and the promise of new listings likely to become increasingly topical in the next few months, investors would do well to remember this kind of research. Promises that you are going to miss out on “the next big thing” may not be justified.
When it comes to IPOs, remember this gem from John Bogle, the founder of the Vanguard Group: “In investing, rely on the ordinary virtues that intelligent, balanced human beings have relied on for centuries: common sense, thrift, realistic expectations, patience, and perseverance.”
