The funds thriving in IPO boom

new floats are oversubscribed as investors eye exceptional profits. Picture: iStock

In a fired-up ASX, the market for new floats is red hot: the average gain on initial public offerings this year to date is 40 per cent.

No wonder new floats are oversubscribed as investors eye exceptional profits. It’s a matter of getting in on the ground floor before these companies convert from private to public

In fact, it’s a global phenomenon: on Wall Street the scale and pace of new floats is only rivalled by a remarkable period two decades ago in late 1999, when “dotcoms” swamped the markets.

This week, the benchmark IPO of the year — that of accommodation service Airbnb — roared onto Wall Street as the company doubled in value on its first day.

In our own market recently we had four significant sharemarket floats in a single session. Compare that to six months ago, when weeks went by without an IPO.

Who’s making the money? Soaring IPOs are lucrative but it’s notoriously difficult to get a slice of action in the best new floats. For every lucky punter who gets in early on a company like defence software group Nuix — up about 50 per cent since listing on December 4 — there are a dozen more who missed out.

“It’s a boom, there’s no other world for it: I’ve never seen anything like it,” says Steve Torso, managing director at Wholesale Investor, a marketplace that matches investors with companies that wish to float.

But there is a major difference inside the local market in this latest version of an IPO craze — a ­circle of investors have been making a lot of cash in what are known as pre-IPO funds

Pre-IPO funds are a loose grouping of funds that specialise in buying into companies before they list. The fund typically takes an early stake in the hopeful start-up and, if that company makes it through to a successful sharemarket float, the payback can be exceptional.

For private investors it’s a way not just to get into the IPO action but to widen bets from individual companies to a group of hopefuls.

And the list of hopefully is getting longer by the day: there are about a dozen companies still trying to list by the end of the year — and that’s just among the 40 companies that have signed on with the ASX to get in the queue.

For the IPO funds, it’s haymaking time. The Regal Funds group has been in the game since 2016 with a handful of funds taking stakes in companies that have successfully listed of late such as Aussie Broadband or Booktopia.

The group has more than half a billion dollars in pre-IPO funds. The standout is Emerging Companies Fund No 3, which launched exactly a year ago and investors have doubled their money since that time.

Regal’s latest pre-IPO funds closed this week within 48 hours of opening for subscriptions — it got two dollars in for every dollar it wanted. In common with almost all these funds, the Regal fund is “wholesale” and that makes it exclusive, though many retail investors with self managed super funds are now playing in this space.

Perennial offers two “private to public” funds: Andrew Smith, the group’s head of research for smaller companies and microcaps, says Perennial looked at 600 companies, in the end committing money to fewer than 30 companies, and then shepherding those companies towards growth. “This is not like venture capital where there might a ‘ten bagger’ (which returns $10 for every $1 invested) and lots of loss makers, we aim to have every investment succeed.”

Perennial’s “private to public” opportunities fund started in ­August last year and is up 50 per cent since that time.

At Ellerston Capital, the JAADE Private Asset Fund is a high conviction fund that targets a hefty 20 per cent return per annum. Ellerston’s David Leslie says the fund’s portfolio size is just eight companies.

Leslie says: “We will commit to the companies — but the investors also really need to commit for the cycle. We like to be in for two to four years. It’s patient capital where there will ultimately be a liquidity event.” That’s market shorthand for a big payday either through a float or trade sale.

With the widening of the private market to include online marketplaces such as Wholesale Investor or crowd-funding platforms such as VentureCrowd, the pre-IPO world is not quite as arcane or exclusive as it used to be. But mostly we are still talking big amounts of money locked away for years, coupled with performance fees and only the occasional chances of getting funds out.

How long can the boom last? Torso says: “I’ve no idea how long it will last. I know that many investors when they make some money in this space, go back in and recycle their investments again as they feel more confident.”

Investors in these funds will be hoping it lasts a lot longer than it did in December 1999 when three months later it all ended in tears with the dot.com crash.