Pay­ing the price for the IPO vice

Over­promis­ing and un­der­de­liv­er­ing is com­mon with IPOs, writes Robert Laing, who il­lus­trates how risky it is to fall into the trap of get­ting in too early

Financial Mail - Investors Monthly - - Front Page -

I t is a painful les­son for many novice in­vestors that IPO usu­ally stands for “it’s prob­a­bly over­priced”. The re­sale value of brand-new shares is sim­i­lar to that of brand-new cars, where the “new­ness” in­flates the price by at least a third, which van­ishes as soon as you leave the show­room.

Buy­ing shares at their stock mar­ket de­but is usu­ally a bad idea, but it is im­por­tant to track the fre­quency of IPOs and the qual­ity of the com­pa­nies go­ing pub­lic to keep track of which part of the boom-and-bust cy­cle you find your­self in.

The re­cent his­tory of the JSE’s prop­erty sec­tor il­lus­trates that when the IPO merry-gor­ound starts swing­ing too wildly, with new com­pa­nies without track records list­ing fast and fu­ri­ously, there are tears on the way.

“Some­where in the mid­dle of the bull mar­ket the first flota­tions make their ap­pear­ance. These are priced not unattrac­tively, and some large prof­its are made by the buy­ers of the early is­sues,” Ben­jamin Gra­ham wrote in his clas­sic book The In­tel­li­gent In­vestor.

Out­side of the prop­erty sec­tor, there was an IPO drought un­til Dis-Chem listed in Novem­ber 2016. The founders of the phar­macy group sold 27.5% of it by plac­ing shares with in­sti­tu­tions whose pro­fes­sional and ex­pe­ri­enced fund man­agers set an IPO price of R18.50 in the bid­ding rounds be­fore the com­pany started trad­ing on the JSE in Novem­ber 2016. The shares held their R18.50 pri­vate place­ment price, dou­bling within a year.

Though the share price tum­bled in April, it is still trad­ing at about R30, which is well above its IPO price.

Ini­tial pub­lic of­fer­ings on the JSE are typ­i­cally done via pri­vate place­ments to se­lected in­sti­tu­tional in­vestors ahead of the shares trad­ing pub­licly — a style of IPO that is of­ten said to be stand­ing for “in­sid­ers pri­vate op­por­tu­nity”.

If the in­sti­tu­tions that par­tic­i­pated in the pri­vate place­ments of those IPOs that fol­lowed Dis-Chem hoped to make a quick buck from “pump­ing and dump­ing” the shares by hyp­ing their flota­tions, they were out of luck.

IPOs that fol­lowed DisChem in­cluded those of Pa­trice Mot­sepe’s African Rain­bow Cap­i­tal (ARC) In­vest­ments, Brian Joffe’s Long4Life, fast-mov­ing con­sumer goods group Lib- star, and Shell’s for­mer African arm Vivo. In all of these cases pa­tient re­tail in­vestors who waited a few months got the shares cheaper than the clique of in­sti­tu­tional in­vestors in­vited to the pre-list­ing party.

At the time of writ­ing, none of these shares has re­gained its pri­vate place­ment prices since its stock mar­ket de­buts.

When Mot­sepe of­fered 22% of ARC In­vest­ments at R8.50 a share to the pub­lic in Septem­ber 2017, de­mand was so high the num­ber of shares sold was in­creased to 25% of the 1-bil­lion is­sued. Rather than sub­scrib­ing for the IPO, pa­tient share­hold-

Pa­tient re­tail in­vestors who waited a few months got the shares cheaper than the clique of in­sti­tu­tional in­vestors in­vited to the pre-list­ing party

It’s prob overp ably HELL riced ... YEAH !!!

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