When to buy into new ASX listings. Hint: not during an IPO

Investors may be better off waiting 1-2 years after an IPO before buying shares.

A man looks at his laptop waiting in anticipation.

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Key points

  • 240 companies listed on the ASX in 2021
  • 6 of the top-10 IPOs are trading below their listing price
  • Retail investors could be better off waiting 1-2 years before investing

There were 240 listings on the ASX in 2021. That's the most initial public offerings (IPOs) in any given year since 2007.

Yet, despite a lot of excitement in the leadup to and in the early days of a new ASX listing, many of these companies are now trading below their IPO prices.

In fact, according to The Australian Financial Review, the 10 biggest IPOs in 2021 are currently trading at a median 10% below their issue price.

Some, as you'd expect, have done better while others have fared significantly worse.

The top 3 ASX listings in 2021

GQG Partners Inc (ASX: GQG) was the biggest new IPO last year. The global boutique asset management firm was valued at $5.9 billion at listing with an offer price of $2 per share. GQG is currently trading at $1.52 per share, down 24%.

The second biggest listing on the ASX last year was APM Human Services International Ltd (ASX: APM). The company provides services to job seekers and employers. It was valued at $3.2 billion at listing with an offer price of $3.55. APM is currently trading at $2.65 per share, down more than 25%.

Then there's PEXA Group Ltd (ASX: PXA). Coming in as the third biggest listing on the ASX in 2021 with an initial valuation of $3 billion, Pexa breaks the trend by posting a solid gain since its IPO. The company, which provide an electronic conveyancing platform for Aussie real estate, listed at an offer price of $17.13 per share. Its currently trading for $19.42 per share, up 13%.

What the experts are saying about IPOs

With these figures in mind, here's what the experts are saying about new listings on the ASX.

Carlos Gil is the chief investment officer at Microequities Asset Management. According to Gil (quoted by the AFR):

The sweet spot to buy a new listing is often 12 to 24 months after its IPO. By then, the fizzle that accompanies that IPO has faded. There's less media coverage and hype… Small-cap listings fall off the radar if there is a lack of news after listing or if the share price disappoints. Investors quickly forget about the company.

The 1-2 year pause before buying also revolves around the issue of seed investors. Those are the initial investors, frequently institutional, that get into the IPO often with conditions that they can't sell their shares until some time in the future, like 12-24 months after listing. And that can put pressure on the share prices.

According to Hugh Dive, chief investment officer of Atlas Funds Management:

If you look at the biggest IPOs, the amount of capital raised was only a small proportion of the market capitalisation at listing. Big investors in these companies will look to sell this year or next – there could be a lot of elephants trying to get through a small door at the same time.

Commenting on the new ASX listings in 2021, Paul Biddle, portfolio manager of Celeste Funds Management, said many of the valuations were overly optimistic.

"We looked at a lot of them, but valuations overall were frothy," he said, as reported by the AFR. "Growth expectations factored into the valuations of a lot of IPOs won't be met this year. Some will do well, but the forecasts for many will be too bullish in hindsight."

Then there's the question of even getting in on the ground floor of an attractive IPO. Often you'll find most of the shares have been snapped up by what are known as cornerstone investors.

Richard Ivers, a portfolio manager at Prime Value Asset Management, pointed out, "There were some good floats, but most of the stock went to a small group of cornerstone investors. There was little left over for other investors."

Some food for thought the next time you're eyeing an upcoming ASX listing.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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