Buoyant market surfing IPO pipeline

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After ‘remarkable’ 12 months with raft of new listings, investors warned to be selective

World sharemarkets are in a bull phase and the New Zealand sharemarket is no exception.

Since the start of last year, the market has rallied by more than 1100 points, or 27.5 per cent, on the benchmark NZX50 index.

The local market has benefited from improved growth prospects at a time when there has been plenty of cash roaming the world trying to find better returns than the current, abnormally low, interest rates that are prevailing.

With that kind of performance, it's no wonder new share offers have found their way on to the market.

This was the case in 2013 and looks to remain that way this year while current conditions persist.

"It has been a remarkable year," said Matt Goodson, managing director at Salt Funds Management.

Salt's view is that the market is already fully priced in expectation of a range of things, including a stronger economy, and stronger earnings flows.

"Obviously that is lifting share prices to a level where it's generating quite a few selldowns for existing businesses and new equity raising at attractive levels for private equity to exit," Goodson said.

"We've seen a whole mix of things come to the market, and until the recent technology-based volatility of the last few weeks there have been any number of tech companies looking to get to the market as well."

But new companies required a lot of research because they could present a raft of unknowns, he said.

Across the Tasman, the IPO "pipeline" is big, despite a sluggish economy, much of it driven by private equity companies looking to take their profits and move on to greener pastures.

Goodson said recent volatility in the technology growth style stocks had made the market more discerning. "The encouraging thing about it is all the new capital to be invested, which will create jobs and earnings.

"But as an investor you have to be very careful, because there will be some good deals and some not so good deals," Goodson said. "You have to be discerning and there is plenty of academic research out there that shows IPOs tend to underperform over time.

"The reason for that is that most IPOs come to the market when the market itself is quite highly valued."

Many, like Goodson, point to the need for investor caution when dealing with IPOs.

This year has, so far, been a happy hunting ground for sharemarket investors since a raft of new issues have come to the New Zealand share market over the last 12 months.

For the most part, they have performed strongly, with only a few exceptions.

Paul Richardson, chief investment officer at Mint Asset Management, said the success of cloud computing company Xero had encouraged a raft of smaller technology companies to look at listing.

He said IPOs tended to go in bursts but the conditions needed to be right.

He echoed Goodson's concerns that a rush of IPOs can be a sign that the market is getting a bit "heady".

"You can have periods of a greater number of IPOs trying to get in late in the period before the door closes ... Often, when there's a late rush, the lower quality issues emerge."

John Moore, managing director at Miro Capital Advisory, said the talk in the market was that there were 20 or 30 possible companies looking at IPOs at any given time but only a fraction of that number were likely to see the light of day.

"There are a large number of companies who are potentially interested in looking at IPOs - more than there have been for a long time, which is great.

"What is also good is that the market is being selective," he said.

"Some don't make it, and that's a good thing. It's not a market that will accept anything."