Financial Mail - Investors Monthly
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
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