With Australia’s capital markets still highly liquid in the wake of COVID-19, investors are on the lookout for more good opportunities in the IPO pipeline.

To get an insight on what fund managers are seeing on the ground, we spoke this week with three experts in the space: Davide Bosio and Rob Hallam from advisory firm Shaw & Partners, and leading fund manager Andrew Smith, head of small caps at Perennial Value.

Looking back over the last six months, Bosio highlighted that like most markets, Australia’s IPO sector could be divided into a tale of two halves — pre and post stimulus.

“IPOs can be difficult at the best of times, so it’s really important to get your timing right,” Bosio said.

“You need capital market strength and some positive investor sentiment to make these things work well. And there were one or two months there where those plans were well and truly on hold, but we’ve seen that change very quickly.”

Indeed, the relative flood of activity is making the March selloff — when stocks bottomed out and just one IPO remained live across the entire Australian market — feel like a distant memory.

“I think that (change) coincided with the stimulus, and without that it would’ve been a different story,” Bosio said.

“But when the government stepped in and said ‘we’re going to stand behind incomes’, then you had banks provide those mortgage support measures. We really haven’t seen that diminish since, so the performance has been pretty spectacular.”


COVID-19 tailwinds

Another key trend taking place is that just like the listed space, IPO activity is tracking the same path of winners and losers that’s been dictated by the crisis.

Both Shaw & Partners and Perennial are working on deals for companies with a strong post-COVID narrative across healthcare, fintech, ecommerce, cloud services and gold prices.

“Anything that fits into that broader thematic has really strong tailwinds,” Hallam, an associate director in Shaw & Partner’s Sydney office, said.

“In terms of acceleration, I feel it (the pandemic) definitely has had that affect. Both in terms of the ability of those companies to go public, but also the recent growth a lot of those companies are experiencing.”

“Some of those smaller companies are growing into larger companies, and might be ready to go public quicker than what previously would’ve been possible.”


Round 2

Perennial’s Smith has seen a similar pickup in activity, where he noted there was now “a larger proportion of companies doing pre-IPO rounds ahead of a formal IPO process, when compared to this time last year”.

Following the success of Perennial’s first public-to-private fund last year, Smith has just opened the books to investors on a new fund, with the goal of raising up to $125m to pursue more pre-IPO opportunities.

In terms of tracking the post-COVID trends, Smith said ecommerce was a key sector of interest given the structural growth opportunities.

“We’re close to completing terms for one such investment in our new fund, and the other sectors we remain active in are healthcare and telecommunications,” he said.

Smith also said not all pre-IPO investments were the same, and the fund adopted a three-pronged investment approach depending on the relevant capital requirements.

“The right structure is important, and it can range from growth/expansion capital (which is typically straight equity investment), to pre-IPO funding (typically convertible notes), or traditional IPOs/placements,” he said.

Smith added that for some companies, staying “private for longer” was beneficial, “to add to scale or improve the business model”

By contrast, Perennial investment Aroa Biosurgery (ASX:ARX) carried out a short pre-IPO funding round while they waited for signs of a recovery in elective surgery.

“That happened several months later and they successfully IPO’d in July,” Smith said.


The road ahead

As a measure of the breadth of IPO deals in the market, Bosio said Shaw & Partners’ IPO pipeline spanned a range of post-COVID sectors.

And being based in WA, Bosio said activity had also picked up for early-stage mining explorers in the wake of a surging gold price.

“If you were to go back even just to late 2019, we hadn’t considered doing too many small exploration style IPOs, whereas now there’s a lot of positive sentiment,” he said.

In fact, anecdotally from the ground level, Bosio said the level of interest was reminiscent of WA’s halcyon days in the 2000’s mining boom.

“We haven’t even lodged prospectuses yet for some of these opportunities, and I’m getting inbound queries from investors and brokers every day asking for an allocation in a deal. So that goes a long way in explaining what the sentiment is like,” he said.

And with policymakers pledging to pull out all the stops to support the economy, that may remain the case for a while yet.

“We see the markets looking forward. So you can still look right now, and if you wanted to take a more negative view it’s very easy to do that with the health risks and the economic shock,” Bosio said.

“The world’s not in a great place, but financial markets look forward. So in a sense, whether it’s tomorrow or a year away, the view is we’ll recover from this and see company earnings start to build.”

“I also think the stimulus has a long tail. So the money that’s getting pumped in the system now should drive things at least three years through the medium term. So I think that’s what we’re seeing on the macro side.”

Among the pre-IPO companies Shaw & Partners are working with is ASX-aspirant Zebit, a US ecommerce company which is aiming to become the next successful competitor in Australia’s much-discussed BNPL sector.

Bosio also flagged the pending float of Australian online cosmetics retailer Adore Beauty.

“That’s a big online business which is majority-owned by Quadrant Private Equity. We’re on the ticket for that with Morgan Stanely and UBS, so it’s a fantastic IPO and we’re really excited about that one,” he said.

There’s also telecommunications company Aussie Broadband, while online book retailer Booktopia is shaping up for another tilt at the ASX boards amid the post-COVID ecommerce boom, after attempts in previous years were aborted.