Capital investment: Floats valued at $14 billion have been offered to the public in the last 12 months. Photo: AFR
The past 12 months or so have seen a record number of floats on the sharemarket.
With about $14 billion worth of initial public offerings over the past year, it is the biggest year since the GFC for bringing companies to market.
In the main, investors have been well rewarded. Of the bigger listings, catering and cleaning business Spotless Group, the credit reporting business Veda Group, Genworth Mortgage Insurance Australia and Healthscope, the hospital, medical centre and pathology operator, have share prices trading significantly above their float prices.
Rudi Filapek-Vandyck, editor of FN Arena financial news and analysis service, says the best bets among the floats tend to be those businesses that have established track records but which have been poorly managed. He says a good example is Dick Smith, which was poorly managed under former owner Woolworths.
Spotless Group, which re-listed in late May, is another example of a company that is now much better managed, he says. Spotless shares debuted at $1.60 in May and are trading at about $2 now.
Shares in Genworth Mortgage Insurance Australia, which debuted at $2.65 in May this year, are now trading at about $3.80, or about 40 per cent higher.
Despite these success stories, investors are certainly not guaranteed a windfall from floats.
Companies with share prices below their float prices include Monash IVF, which floated in June this year. Its share price is about 10 per cent lower. And iSelect, the online insurance comparator, has a share price of about $1.20. It floated in June 2013 with a float price of $1.85 and company has since missed revenue forecasts.
Chris Batchelor, the general manager of Skaffold, an equities researcher, says investors in floats need to understand the business, its industry sector and the risks associated with the business.
Companies with established track records are going to be less risky than companies raising money for a new venture, such as a miner that is not in production. Batchelor says investors have to be particularly careful when the company is being floated by private equity owners who want to exit the business.
"They are generally pretty smart people and if they are selling they think they are going to get good value and are not doing it for charitable reasons," he says. "If they are retaining a reasonable stake in the business, then that is a positive sign," he says. Many of the larger floats of recent times have private equity backers.
Investors should be aware that there is usually an "escrow" period, typically a year or two, after which time the original owners are allowed to sell their shares. "There could be a large overhang of shares that could come onto the market," he says. That could depress the share price, he says.
The success of recent floats and the stellar performance of health insurer NIB, which was floated in 2007, bodes well for the upcoming float of Medibank Private. There are no details yet on the float of Medibank Private, except that the government wants it sold by the middle of next year.
Michael Heffernan, senior client adviser and economist at Lonsec sharebrokers, says government privatisations can be one of the best bets for small investors.
Medibank Private could fetch $4 billion from a float which would make it the biggest listing of a government asset since the sale of the Queensland government's rail business QR National, now called Aurizon, in November 2010. Michael Heffernan says the float of the Medibank Private could prove a windfall for investors.
"It is the giant of the health funds with millions of policyholders," he says. "When the government does a privatisation it wants it to be a success," he says. "The shares will probably be offered at a good discount," Heffernan says.