Deloitte’s new mid-year review found that the technology, media, and telecommunications (TMT) industry led listings for 1H15 (first half of 2015), accounting for 47 percent of listing values and 27 precent of all IPOs.
Over the past 18 months, we’ve seen an increase in ASX listings of technology companies, proving that public markets, is helping fill the funding gap that has many times forced Australian tech startup founders to relocate to places like Silicon Valley and Singapore that have larger funding pools.
“Favourable conditions are adding to confidence among tech companies and financial sponsors that an IPO presents an attractive option to raising growth capital and establishing a profile on public exchanges,” it says on the Deloitte 2015 IPO Market Update.
In addition to increasing the capital on a company’s balance sheet, there are other benefits of going public that are increasingly being recognised by Australian tech founders. For one, public companies have higher valuations – usually double that of a privately-held company.
Another benefit is the ability to divest equity at any time in small or large portions; founders of private companies cannot easily sell 10 percent or 20 percent of their shareholding, whereas when trading on the ASX, they can sell 1 percent, 5 percent or 20 percent. Public companies also have greater credibility; large prospective clients like government departments and corporates are more trusting of, and are more willing to adopt, products supplied by public companies.
This year’s TMT activity was led by the $2.1 billion listing of accounting software company MYOB Group, followed by billboard operator QMS Media, which raised $90 million with a market capitalisation of $163.5 million, and bespoke software developer Touchcorp, which raised $56 million with a market capitalisation of $162 million upon listing.
The remaining listings had an average market capitalisation of $50 million, “underscoring the trend of young, small-cap technology firms finding their place on the ASX”, according to Deloitte’s mid-year report.
From January to June 2014, 22 IPOs had raised $4.6 billion. The same six-month period this year saw 30 IPOs raise $2.5 billion, a rise in number of IPOs, but a steep decline in funds raised. Of the $2.5 billion raised in 1H15, private equity-backed listings accounted for 67 percent (or $1.7 billion), surpassing full-year deal statistics for 2014, when private equity exits and equity sales via IPO accounted for 46 percent of listing values following a four-year hiatus from the market.
“Despite the differences, half-on-half year comparisons show that debut growth has improved. With market fundamentals largely unchanged, and to absorb capital, IPO proceeds should find it easier to meet their targets going into the second half of 2015 as the wave of listings continues,” said Deloitte Corporate Finance partner and Head of Transaction Services, Ian Turner.
Turner noted that 2014 listings have continued to build on their performance and significantly outperformed the ASX.
“[D]espite global volatility, we are seeing strong investor confidence given the quality of IPOs. You only have to look at the listings for the first half of 2015 and their impressive performance,” Turner said.
“On average, shares of companies that listed in 2014 outperformed the market. But as the supply of sizable listings becomes constrained, investors become more selective, and sceptical, of IPOs, issuers will need to find ways of raising their attractiveness among competing listings.
“So companies that want to be truly effective will have to make the proposition simple via a well-articulated story for their business. Stocks that struggled to go public this year were typically not well understood by the market.”
With the ASX shifting its focus from the mining boom to the tech boom, opportunities exist for Australian tech companies to develop strategies to enter this growing market. However, Deloitte’s report points out that investors, despite having an increasing appetite for technology businesses, are still risk-averse and may limit investments to tech businesses with “robust operating models, profit history, and strong balance sheets”, not early-stage startups that are still testing their business models. This is unhelped by the crisis in the Eurozone and China’s Shanghai exchange.
“Looking to the remainder of 2015, shaken sentiment on the heels of the crisis in the Eurozone and correction of China’s Shanghai exchange is abating, although market volatility and global events will without doubt continue to play a role in the strength of Australia’s IPO pipeline here. It’s encouraging to see that ASX listings in the last two years have held their own, which reflects the quality that investors have come to expect,” said Turner.
“And there’s a lot of positive news coming out of this reporting season with the vast majority of 2014 listings exceeding their prospectus forecasts.”