Velvet-Belle Templeman
Welcome to Grant Thornton’s ‘Navigating the New Normal’ podcast series. My name’s Velvet-Belle Templeman and I’m here talking to Neil Cooke and Jonathan Mather, financial advisory partners at Grant Thornton, specialising in IPOs. Today, we’re talking about the Australian stock market and COVID-19. Thanks so much for joining us, Neil and Jonathan.
Neil Cooke
Thank you.
Jonathan Mather
Thank you very much.
Velvet-Belle Templeman
Now Neil, I’m going to start with a pretty basic question for you. Wouldn’t this be a stupid time to list on the ASX or really on any exchange? From day to day, the market always seems to be changing.
Neil Cooke
I don’t consider it a stupid time to consider a listing. You’ve seen the ASX has been tracking Wall Street and some of the larger tech stocks like Apple and Facebook have had a bit of a correction, clearly over valued. We also know that there are a lot of stocks that were doing well before COVID-19 that will continue to do well post COVID-19. In addition to tech and surprisingly you’ve got health and e-commerce stocks, which are very attractive to investors. We are in a low interest rate environment so investors are putting cash into equities, and over all there’s a lot of investor demand for good businesses with a significant pipeline of IPO’s slated for Quarter 4 of this year.
I also think its just dangerous to draw a parallel to the GFC. Its different now, its not a broken Financial Services sector, it’s a health pandemic that we’re dealing with.
Velvet-Belle Templeman
That’s interesting. How different is this to what you’ve been seeing in the lead-up to COVID, Jonathan?
Jonathan Mather
Just generally, in terms of the ASX activity, there’s been a downward trajectory in the number of new IPOs throughout 2018 and 2019. I’ll just put a bit of colour around that. In the three-year period of 2015 to 2017, there was over 150 new ASX listings per year in each of those three years and what we saw in 2019 was just over 90 new IPOs. But what was interesting about 2019 was that there was a large rush in December. Close to one-fifth of the total IPOs in 2019 happened in December and this was predominantly in the techs – fintech, healthcare and resource company space. It was also largely weighted to the small and mid-cap IPOs. So we’re saying sub-$500 million type of market cap.
This trend continued in Q1 of 2020 as well. More the smaller mid-cap IPOs and larger predominantly tech, healthcare, fintech and resource space as well. I know anecdotally speaking, it felt like Neil and I were out visiting new companies every week in January and February who were looking at an IPO prior to June or earlier, or before Christmas this year.
Velvet-Belle Templeman
Now, there are some commonalities there. Investors were and continue to place their dollar in health and fintech. How would you describe the Australian investor?
Neil Cooke
I think the Australian investor’s looking for businesses which have navigated or benefitted from COVID-19. For example, alternate lenders are quite attractive. You had the recent listing of Laybuy and the upcoming listing of Plenti. I think online businesses are attractive as well and any business that really does not rely on travel or immigration is quite attractive to Australian investors. I think one of the buzz words at the moment is digital adoption or adaption. You’ve seen the inability to travel in people’s time at home has really accelerated the use of the internet, the basic services and e-commerce. They’re the kind of businesses that’s quite attractive to investors looking to deploy capital.
Jonathan Mather
Yeah, I agree with that, there’s been a lot of demand coming up now in the online retail space. Tech, fintech, SaaS businesses – there’s still quite a strong pipeline of companies looking to IPO. In the resources space, the metallurgical outfits as opposed to energy, is getting some good headwind there. One thing that’s been pretty interesting that’s popped up in the last few weeks in our pipeline is a few clean energy assets. Again, moving away from your traditional energy sources to clean energy, so might see some movement in that space over the next 12-18 months as well.
Velvet-Belle Templeman
Surely, even for hot businesses, listing must be risky in this current environment, how do you create confidence for a successful IPO?
Jonathan Mather
Well, I think it’s the same with any, I suppose, transformational event in a business or any major transaction and the key is preparation and making sure your ducks are lined up prior to embarking on the journey, so that’s making sure your legal documentations are in place, you have the right policies in place, the audits are all squared away. Just from our experience, even outside of the COVID environment, companies that are going through the cleaning up process in the middle of an IPO generally have a more costly, drawn-out IPO process. Whereas those that had focused their time prior to embarking the process on getting everything squared away has a more smoother run.
I think one thing that’s interesting about the current environment is, there’s going to be certain windows where it is going to be quite beneficial to IPO and others where it’s not going to be beneficial. I think that’s what we’ve seen in the last few months. When COVID hit mid-March, every deal that we were working on effectively halted, including the IPOs. When you look at the September pipeline on the ASX website, there’s a good 10-11 companies looking to hit the market in the next few weeks. All 10 or 11 of those would not have halted during the onset of COVID. They might have slowed down the process but they would have kept on making sure the stories were clear, making sure the prospectus was still being prepared. I think in this kind of environment, if you really do want to IPO and have a successful listing, if the markets aren’t quite there you don’t need to stop the process fully. You can maybe slow things down but keep things moving so that you’re able to, when the market do stabilise and improve, get a successful deal away quite quickly.
Neil Cooke
The only thing I’d add to that is, I think the fundamentals haven’t changed. I mean, you need a well-articulated business model and good management and board. I think one of the current environment impacts though is that companies and vendors need to have realistic valuation expectations and you’ve seen the heat in the technology sector being driven out of the US and that’s really pushing up some valuation. I think it’s just taking a bit more of a step back and having a long-term view. While we’re also seeing, just to provide some confidence to investors, there’s also companies are still including forecast but certainly for a shorter period. It gives a view of current trading beyond your audited history, but is very difficult to forecast in the current environment. Having a shorter forecast period still gives a view of the future but it also meets all of the regulatory guides that people are familiar with.
Velvet-Belle Templeman
I was reading an article a while back that was talking about the ASX targeting overseas companies to list in Australia, what’s that all about?
Jonathan Mather
Yes, that’s a good question. The ASX, over the last few years, has been embarking on a fairly significant marketing campaign targeting overseas companies and they performed roadshows throughout Silicon Valley in the States, Israel and Ireland. One, I guess, common factor of all those three jurisdictions, is they’re technology hubs. There’s been a real big push by the ASX to be seen as a global source of capital for high-growth technology businesses. Again, earlier this year the ASX launched the ASX200 Technology Index to further cement that image to the global market that, yes, we’re a significant player in tech capital and if you’re a high growth tech busines you want to try and list on the ASX.
Neil Cooke
I think the ASX has also taken advantage of the current situation. I mean, we’re looking at physical borders are closed, but if you’re the technology or a global business, you’re very attracted to Australian investors, you don’t necessarily have to have that bricks and mortar style connection to Australia in the current environment. I think the ASX is doing a really good job in really setting out Australia as a liquid market and also a good target for companies who really want to be playing on the global stage.
Velvet-Belle Templeman
Let’s talk about the ASX then. Why would you list here as opposed to the NASDAQ or FTSE?
Neil Cooke
I think from a following point of view, a lot of companies are earlier stage and if you list on NASDAQ or the FTSE, you’ll just get lost amongst all the other companies. Also, there’s a lot of companies that are a bit too small for those exchanges. I think with the ASX, you’ve got very strong retail investor base. They’re very knowledgeable and arguably, sometimes you can get a higher valuation on the ASX compared to some of the overseas exchanges. If we just look a bit more closer to home around the region, you’re looking at places like Hong Kong, Singapore, really cost prohibitive to list there and also, when we look at NASDAQ and the FTSE, to maintain a listing it can also be cost prohibitive. So I think the ASX just really set itself out to be a liquid market which is cost effective but still has the same governance.
Jonathan Mather
Yeah, that’s a good point, Neil. There’s been quite a number of successful overseas based IPOs in the recent history. Some examples include Limeade, which is an employee experience software business, they raised $100 million dollars in December last year at a market cap of just under $400 million. Nitro, another software business, listed in December ’19 with a market cap of $325 million, raised $110 million. Sezzle, another overseas based business, a July listing raising $43 million. These are not, again, massive IPOs, but in that mid-market space and probably would not have got the traction that they would over in their home jurisdictions.
Velvet-Belle Templeman
I know it’s hard to predict the future of the ASX, people have made and lost fortunes in the attempt, but if we take what we know about the ASX and how it wants to position itself in the future, and our experiences from recessions in the past, what do you think we might see in the next two to five years?
Neil Cooke
Yes, it’s very difficult to have a crystal ball in the COVID environment, it’s hard to predict. We’ll admit, we’re only six months into COVID-19 and how long that lasts, nobody knows. But I think in Australia there’s a significant amount of capital to be deployed and so as long as the investor confidence is maintained, people just get used to this as the new normal and there should be a continued pipeline of IPOs and pretty strong market. I think with our superannuation system and – also, you’ve got a lot of people sitting at home, the day-traders, playing the stock market. That really keeps the market liquid, keeps prices overly over-inflated at times. But certainly, there is significant capital to be deployed and a lot of people have got superannuation sitting in cash where obviously you’re not getting a return that you would get on an equities market.
As I say, it’s difficult to predict, I wouldn’t be doing this job if I could predict accurately, but I think certainly what we’re seeing is I think as long as the confidence stays with the market, there should be sufficient pipelines there for investors.
Jonathan Mather
Yeah, I agree with what Neil is saying. The one thing that makes this very different is, when you compare it to the GFC which was the broker and financial services sector, this recession we’re in is a global health pandemic. The economy was quite buoyant before that and at the moment it’s proven to be quite resilient, I feel. Yeah, as Neil said, if we knew where the markets were heading I probably wouldn’t be here at this point but it’ll be interesting to see what happens over the next few years.
Velvet-Belle Templeman
Neil and Jonathan, thank you for your time.
Jonathan Mather
It’s been a pleasure.
Neil Cooke
Thank you.
