‘Capital waiting’ as IPO market reawakens
An AFR article by Tess Bennett
Tuesday 18th July 2023
Australian tech investors and private company CEOs are optimistic that the window for public listings could soon start to open, after the worst year for IPOs in a decade, as companies seek to test appetite for long-term growth.
The last big local tech IPO was hotel- booking ﬁrm SiteMinder in late 2021, which raised $627 million to list with a $1.36 billion market capitalisation. It closed the day worth $1.88 billion. Yesterday, the company was valued at $980 million.
The scarcity of new listings and take- overs has reduced the number of public companies, meaning the Australian sharemarket will shrink this year for the ﬁrst time since 2005.
David Willington, the co-founder of pre-IPO investor Bombora Investment Management, says he has noticed a change in the mood among investors over the past three months, which could signal the end of a challenging period for listed tech companies.
‘‘Clearly, it has been a tough market in the last 18 months for high-growth tech companies as the fear of rising interest rates and geopolitical factors saw investors desert long-dated investments such as loss-making growth tech companies,’’ Mr Willington said.
‘‘However, in the last few months we have seen the early stages of a recovery in sentiment. We believe there is a lot of capital waiting on the sidelines that will be rapidly deployed when the market turn commences in full swing.’’
The upswing could be as early as the second half of calendar 2023, he said.
Bombora is one of the most meaningful players in Australia’s pre-IPO funding market, backing the likes of video creation business 90 Seconds, smart cities, and infrastructure engineering company LVX Global and Melbourne-based Marketplacer.
‘‘We think when the markets turn they will turn hard and fast,’’ Mr Willington said.
Richard White, CEO and founder of WiseTech Global, said the IPO market would pick up speed once interest rates topped out or, more likely, when central banks start cutting rates. ‘‘Companies that can ﬂoat don’t need or want to; the ones that need to ﬂoat, can’t,’’ Mr White said.
‘‘In a technical sense, the IPO window will always be open for the best of the high-growth, highly proﬁtable businesses that wish to go public. However, those types of businesses have a lot of choice about how, when and where they IPO.’’
Dave Stevens, founder, and managing director of veteran ASX-hopeful Brennan, said he was in no hurry to test the IPO market.
The IT consultancy and systems integrator wants to tap the public markets to fund future acquisitions, but Mr Stevens said he was happy to wait for others to make their debut ﬁrst.
‘‘We’ve got no particular reason to need to push to be the ﬁrst [to list],’’ he told The Australian Financial Review.
‘‘It’s a step on the journey for me. I’ve been doing this for 26 years and the way that we’ve run the business to date is just to make sure that we get all of those important steps right.’’
‘‘We’ve got access to plenty of capital for growth … but we continue to prepare and if the markets open it’s an absolute option for us to consider.’’
Another IPO candidate is CurveBeam AI, which opened its books last week, seeking to raise $25 million for a $153.7 million market capitalisation at listing.
Hashan De Silva, CurveBeam AI director, and the founder and managing partner of healthcare investor KP Rx, is tipping that the tech IPO window will reopen slowly, and it is going to take a number of more successful IPOs to entice fund managers back to the market.
‘‘While a successful CurveBeam AI IPO will help in opening the IPO window, I believe there will need to be a few more successful IPOs, especially of R&D stage companies, before the IPO market will recover,’’ Mr De Silva said.
‘‘In these current conditions, there is so much value in already listed tech and healthcare companies that fund managers do not want or need to take the added risk of an IPO.’’
Andrew Mitchell, director and senior portfolio manager at Ophir Asset Management, said private companies were currently being valued more generously than listed stocks, and cautioned that a slew of IPOs could trigger a wave of markdowns in the private markets.
‘‘At the moment, venture capital funds and pre-IPO funds can just kick the can and put in a little bit of money to maintain elevated valuations for their tech companies,’’ he said.
Mr Mitchell agreed Australia needed a ‘‘good IPO’’ to really open up the market, which was down 92 per cent in 2022, compared to 2021, making it the worst year for IPOs in a decade.
‘‘Investment banks are nervous to launch now that conditions could change quickly, and investors lose signiﬁcant money, which would put a stink around any IPO for a while,’’ he said.
‘‘We need to see core inﬂation down around the 3 per cent level and economic growth to hold strong before we see any significant tech IPOs. The market needs to be certain we have avoided a recession and stagﬂation before it will support a large high-growth tech IPO at a valuation private investors are happy with.’’
Trade sales trump IPO
Michelle Deaker, managing director and founding partner of one of Australia’s largest VC funds, OneVentures, said some start-ups in her portfolio that had been considering an IPO were now heading towards a trade sale.
‘‘Some of those companies have very good opportunities in the M&A market, and it’s a cleaner exit for us than an IPO,’’ Dr Deaker said.
David Kirk, co-founder and managing partner of a listed venture capital fund, said there was always money available for the right business, but investors and IPO candidates would need to agree on the valuation.
‘‘The question of when the market will reopen for IPOs is really a question of what type of company, at what price will be supported by buyers?’’ he said.
‘‘The answer is bigger, more profitable companies with higher margins, good cash retention and demonstrated operating leverage at a much lower price than 18 months ago.’’
Platypus Asset Management’s Prasad Patkar said there was investor appetite for tech companies with large addressable markets, making solid margins with strong cash conversion.
‘‘IPO hopefuls with such attributes will ﬁnd that the market is wide open for them. For the others that were ﬂying when there was a mania in tech, need not apply,’’ he said.