Some IPOs disappoint investors, unable to meet their prospectus forecasts or implement their growth strategy. Others fail because they eventually run out of cash, unable to raise more equity or debt capital.

The IPO market tends to be cyclical, meaning there are more floats in a bull market when companies seek capital to grow and investor risk appetite rises. And fewer IPOs in a bear market when investors may have less interest in new offerings.

With the S&P/ASX 200 Index near a record high [3], it’s possible there could be an increase in IPOs in 2025, if current sharemarket conditions persist. That makes it a good time to learn about the features, benefits and risks of investing in IPOs on ASX. 

The IPO market has a vital role. New listings add to the size and diversity of ASX-listed companies. They also help companies with capital raising, share liquidity, price discovery and profile. For investors, IPOs are a way to invest in newly listed companies for the for first time and add a new exposure to a portfolio.

Understanding what to look for in an IPO – and the different risk profile of newly listed companies compared to long-established listed entities – can be valuable. As with any new investment, investor education and research is key.

No generic list of IPO considerations can do justice to such a diverse market. Analysing the float of a small mining exploration company is different to an emerging biotech company or large government privatisation, such as CBA.

The list, below, however, is a starting point for investors who are new to IPO investing. This list assumes investors have bought and sold shares before and have an intermediate level of investment knowledge. 

As with any investor education content, it is recommended that you do further research of your own and speak to a licensed financial adviser before acting on themes in this material.
 

Here are 10 IPO considerations:
 

1. Is the information trustworthy?

In this age of misinformation and disinformation, it’s never been more important to source information from trustworthy places. Upcoming Floats and Listings lists all companies intending to list on ASX in the next four to six weeks. It provides a snapshot of key IPO information and a link to the company’s website, where you can read or download its prospectus. 

In some cases, the Australian Securities and Investments Commission (ASIC) may require an IPO to issue a supplementary or replacement prospectus, to address any deficiencies in the original document. Ensure you are reading the latest version of the prospectus, in case any information has changed.

2. Is investing in an IPO different? 

All investments have risks and all companies have risks specific to them and their industry. IPOs have additional risk considerations because they are listing on an exchange for the first time and transitioning from private to public ownership. 

Unlike a long-established ASX-listed entity, an IPO doesn’t have any history as a listed company, has not published financial accounts as a listed company, has not been subject to the governance requirements of a listed company or had to deal with the additional media and public interest that often comes with a listing.

Moreover, IPOs can be accompanied by investor relations roadshows, media articles and positive broking recommendations and research. Prospectuses can be persuasive as the IPO, understandably, presents itself in the best possibly way to attract investors and raise capital.

The key is understanding these risks and making an informed decision about whether the IPO’s valuation adequately reflects the risks and opportunities.

3. How do I read a prospectus? 

The prospectus contains detailed information about the company and its share offer, and is the key document that investors use when assessing the IPO.

Although the length varies, an IPO prospectus is typically more than 100 pages. They can be heavy reading for retail investors given the amount of financial, legal and other technical information in the document. 

A typical prospectus contains key offer statistics, a chairperson’s letter, investment overview, industry overview, company description, financial information, risk factors, board and management, offer details, the investigating accountant’s report, other expert reports, additional information and a glossary.

Some retail investors might focus on the key offer statistics, chairperson’s letter and the investment overview, which summarises the prospectus (usually the first 10-15 pages of the document). Others might choose to read more of a prospectus or the whole thing.

4. Do I understand the business?

This question is important for all share investments, not only IPOs. If you can’t understand what the company does or how it makes money, that might be a sign to pause, do your more research or talk to a licensed financial adviser. 

Some companies, of course, are easier to understand than others. An investor in the Guzman Y Gomez (ASX: GYG) float last year could visit the Mexican-themed restaurant to assess its offering. That’s not so easy for a mining IPO with a project in Africa or a biotech company developing a drug in a laboratory.

Still, it pays to understand the IPO’s products or services, its business model (how it makes money) and its history (how long the company has operated). The section in the prospectus on ‘The company’s business’ is a good place to start.

5. What is the company trying to do?

This is a simple way of thinking about the firm’s industry, competitive position and strategy. For example, the Guzman Y Gomez prospectus said the company works in the Quick Service Restaurant (QSR) industry, provided growth forecasts for QSR industries in countries where GYG operates and outlined the firm’s main competitors [4]. 

The prospectus also described GYG’s growth strategy to open more stores and the company’s main strengths. In the prospectus, this information was in the Investment Overview and expanded on in the Industry Overview.   

Understanding the industry’s growth prospects, and the company’s competitive positioning and advantages within that industry, is an important part of researching an IPO – or any investment for that matter. 

6. What are the main risks?

Understanding company and industry risks is essential. With an IPO, extra attention to key risks is required because the company (as mentioned in point 2 above) typically has no history as a listed entity.

The prospectus summarises the company’s key risks and usually expands on them in greater detail in the Key Risks section. It can be worthwhile noting a few key risks for an IPO and forming a view on their likelihood of occurring. 

The potential for higher share-price volatility is another risk to consider. The share price of some IPOs can be more volatile after listing as IPO investors sell (possibly to make early gains) and others buy when the company is listed. This might not concern long-term investors, but those with a short-term investment horizon should consider the risk of price volatility after listing.

7. Will the company be well governed?

This is an important, sometimes overlooked, aspect of IPO investing. Many IPO investors focus on management credentials: who is the CEO, what are their main achievements and who are the other key executives? 

That’s important, but management only tells part of the story. The IPO’s board should represent the interests of shareholders, ensure management is appropriately incentivised, monitor management performance, and ensure the company meets its various regulatory, governance and listing requirements.

A prospective IPO investor could assess the size of the IPO’s board, its experience and diversity, and its level of independence. As a rule of thumb, smaller IPOs have smaller boards and vice versa. 

The key is forming a view on whether the IPO’s board has sufficient expertise and experience, and will act in the best interests of all shareholders. The section on Management and Board in the prospectus provides more information on key executives and directors. 

8. How are IPO proceeds being used?

Professional investors, such as fund managers, often focus on how capital raised from an IPO is used. Is the capital being reinvested in the business to help it grow or buy other businesses? Or is part of the IPO proceeds going to existing shareholders (such as the company founder) who sell their shares?

Some investors prefer IPOs where founders retain a significant amount of shares, meaning their incentives to grow the business are more aligned with new shareholders. Other investors are prepared to back IPOs where capital raised goes to the vendor, such as a private equity firm or founder that previously owned the business. 

The Investment Overview in the prospectus typically summarises the purpose and use of funds raised through the IPO.

9. Does the IPO’s valuation stack up? 

Entire books could be written on IPO valuations. For most retail investors, the simplest approach is to look at the IPO’s key valuation metrics and compare it to similar firms in its industry. The valuation metrics of Guzman Y Gomez, for example, could be compared to fast-food stocks in Australia and overseas.

IPO valuations are rarely straightforward. Smaller IPOs, such as junior minerals explorers or biotech firms, may not have revenue or earnings because they are developing a project or researching a drug. Their Price Earnings (PE) ratio doesn’t exist yet, because there is no ‘E’ (earnings) in that equation. Forming a view on their valuation may require comparisons to companies in their location or field, at similar stages of development.

Another consideration is earnings forecasts. As a new listing, IPO investors rely on the earnings forecasts the company provides (if it earns revenue and provides forecasts) and use those forecasts as a basis to make their own projections.

Some IPOs have limited research coverage from brokers and no ‘consensus’ view of their future earnings or valuation. This lack of research can make forming a view on an IPO’s valuation more challenging, but it can also potentially be an opportunity if the company is under-researched.
 

10. What happens if I can’t get shares in an IPO?

Some retail investors might find it hard to get shares in an in-demand IPO if they are not clients of the offer’s sponsoring broker. One option to consider is buying those shares on-market after the company lists.

Another option is following the company in the first year or two after its lists, assessing its performance as a listed company and its valuation. 

Sometimes there are opportunities to buy an IPO at a lower price than its issue price after the company lists, if initial interest in the offer fades or as early investors in the float sell their shares, once they are able to do so (once the relevant escrow period expires and restricted securities can be sold).

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[1] Commonwealth Bank of Australia. ’25 Years as Public Company’. 

[2] Based on CBA share price of $157.42. At 26 November 2024. Source: www.asx.com.au

[3] At 26 November 2024

[4] Guzman Y Gomez Prospectus (2024). P12