IPO pipeline set to grow in 2014

A number of IPOs have underperformed this year, so what should investors do?

a woman

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Given the solid performance of the ASX over the last 18 months, we have seen a number of initial public offerings (IPO) in recent times, as companies have sought to take advantage of the market's upturn and the general good mood of investors.

While a number of these IPOs have been successful, including that of IVF specialist Virtus Health (ASX: VRT), insurance broker Steadfast (ASX: SDF) and foreign currency trader OzForex (ASX: OFX), others have not. Following the poor performances of companies such as Pact Group (ASX: PGH), Dick Smith (ASX: DSH) and Nine Entertainment (ASX: NEC), investors have been left wondering whether the demand for floats in 2014 has been dampened.

Despite these poor performances, investment bank UBS believes the IPO pipeline will continue to expand while merger and acquisition activity (M&A) will also climb in the New Year.

As reported by The Australian Financial Review, the local equity capital market (ECM) is set to record a total volume of around $24 billion in 2013, whereby IPO activity has been the "dominant theme" in the second half. While this is an increase of more than 15% compared to 2012, it is significantly lower than the decade average of $40 billion per year.

UBS ECM executive director Richard Sleijpen said: "We have seen very strong investor support for growth businesses, particularly where the investment case offers a unique exposure that is hard to get through existing listed companies." This suggests that businesses will continue to see value in floating their shares on the stockmarket.

Foolish takeaway

While IPOs tend to attract a lot of attention, investors should remain wary and carefully sift through them to find which ones are reasonably priced and will be able to grow in the long-term. As Foolish investors know, no company is a buy at any price.

Get the full report on our top dividend stock for 2014 — FREE!

Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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