Why do we have so few IPOs in New Zealand? The NZX will have only three main board IPOs in the current year compared with 12 in 2014 and seven in 2013.
This is a long, long way from the 65, 50, 32 and 31 IPOs in 1987, 1986, 1985 and 1984 respectively.
The 2015 year has been a positive one for the domestic sharemarket yet only $200 million of new capital will be raised from these main board IPOs compared with $1.99 billion last year and $4.68 billion in 2013.
The NZX should attract far more IPOs than it has in recent years.
2013 was the best year for IPOs since 2007, with Meridian Energy ($1.88 billion), Mighty River Power ($1.72 billion) and Z Energy ($840 million) being the largest new offerings.
The others were Synlait Milk ($114 million), Wynyard ($65 million), Airwork ($38 million) and SLI Systems ($27 million). Six of the seven companies are trading above their IPO price, with SLI Systems the notable exception as its share price has fallen from the $1.50 issue price to 79c.
The best performing 2013 IPO has been Z Energy, with a share price of $6.57 compared with its $3.50 issue price.
The strong performance of the 2013 IPOs suggested there would be a significant increase in IPOs last year.
This proved to be the case but unfortunately these new listings have been a major disappointment.
The accompanying table lists the 12 2014 and two completed 2015 IPOs according to their listing date. It also includes the amount raised, issue price, current share price and capital return.
The first point to note is that eight of the 2014 IPOs have had negative capital returns since listing. Vista Group has been the clear winner, with a 140 per cent return since listing in August 2014. It is followed by Scales Corporation, with a positive 39 per cent and Genesis Energy, plus 25 per cent.
All three electricity company partial privatisations have had positive capital returns, with Meridian Energy up 57 per cent since listing and Mighty River Power 16 per cent.
The worst performing 2014 IPOs have been Intueri Education, with a 78 per cent capital loss, Orion Health, which is down 42 per cent, and ikeGPS off 32 per cent.
It is clear from these figures that the 2014 IPO prices were far too high as directors, vendors and investment bankers were too optimistic. Many of these companies have not achieved their prospectus forecasts and predictions.
Hirepool pulled its IPO last year because the vendors could not achieve the issue price they wanted. This was a clear indication that vendors were looking for high IPO prices and if they couldn't achieve this they would abandon their issue. Subsequently, Carter Holt and Tegel have looked at listing on the NZX but have not proceeded, presumably because vendors were not happy with the IPO price.
Ironically, the Crown has done a far better job at pricing IPOs than the private sector - particularly as far as investors are concerned - with a large percentage of the 2.5 million-plus KiwiSaver investors benefiting from the realistic pricing of the Genesis Energy, Meridian Energy and Mighty River Power offerings.
In light of the poor performance of the 2014 IPOs it is not surprising that 2015 has been a disappointing year, with only two completed new main board IPOs, Fliway and CBL Corporation. Sentiment plays a major role in the investment decision- making process and if sentiment turns negative towards IPOs because of their poor performances then there will be reduced demand for new IPOs.
The two new 2015 main board listings have raised only $166 million, with CBL having a positive 39 per cent return since listing in October, while Fliway's share price has fallen 19 per cent.
There are a number of other reasons for the low number of NZX IPOs including:
The ASX is more attractive for new listings because a much higher percentage of individual and institutional investors across the Tasman are willing to invest in higher risk IPOs.
This bias towards the ASX is reflected in the fact seven of the 14 completed IPOs in 2014 and 2015 have also listed on the ASX.
Martin Aircraft, the Martin Jetpack operator, bypassed the NZX and went straight to the ASX where its shares are trading at A92c compared with the A40c a share issue price.
ASX IPOs are performing much better than NZX IPOs. The 87 ASX new listings since the end of 2012 have had an average unweighted capital return of 41 per cent compared with only 11 per cent for the 21 NZX new listings. Australian IPOs have substantially outperformed the overall market while IPOs here have underperformed the market average.
The NZX has been very slow at developing a cost-effective IPO structure for smaller companies and it has also been unsuccessful in promoting the NZX as an excellent vehicle to raise new equity. Crowdfunding platforms attract more publicity than the NZX as far as capital raisings are concerned.
The domestic stockbroking sector has shrunk substantially since the 1980s, when many of the medium and small-sized brokers played a major role in the 1984 to 1987 IPO boom.
The demise of medium and small-sized broking firms has resulted in less research coverage of newly listed NZX companies. Newly listed companies are much more likely to underperform if they have no research coverage and the wider coverage of new listings in Australia has contributed to their superior performance.
The banks are increasingly dominating the New Zealand fund management sector, particularly KiwiSaver, and they tend to take a more cautious approach towards high-risk IPOs than non-bank investment managers.
Unfortunately, there is no quick fix as far NZX's IPO problems are concerned, particularly as directors, vendors and investment bankers insist on setting issue prices at the top end of the range.
The Crown did its best to reinvigorate the IPO market through the realistic price of the electricity generators but the private sector has undone this goodwill by overpricing nine of the 13 IPOs since the Government's last partial privatisation.
The only definite upcoming IPO is AFT Pharmaceuticals, which released a product disclosure statement on December 1 and is expected to list on the NZX and ASX on December 22.
It is difficult to predict the number of NZX IPOs in 2016, partly because the domestic business sector takes a long time to gear up at the beginning of a new year. We usually have to wait until April or May to gauge IPO activity as there were no new listings in the first quarter of 2013, 2014 and 2015 while only 10 of the 113 IPOs in the 1984 to 1986 period were in the January to March period.
1987, the year of the infamous crash, was totally different as 24 of the 65 IPOs were in the first quarter as a frenzy of new issues signalled the high point of the 1980s sharemarket boom and bust.
The biggest consolation from the current dearth of new listings is that most sharemarket bubbles finish with a massive increase in hyped-up IPOs and the low level of IPOs indicates the NZX is not in bubble territory.
Brian Gaynor is an executive director of Milford Asset Management which holds shares in many of the companies listed in this column on behalf of clients.