What Is An IPO In Australia?

The year 2021 was known as a stand-out year for Australian IPOs, which raised over $13 billion in capital—the most over the previous seven years. There were 240 new listings on the ASX, which was the largest since 2007.

As ASX Listings’s Alice Nguyen notes, the IPO market was relatively quiet in 2022 and 2023.

However she added that the “ASX has seen around $1 trillion in additional capital quoted on the market over the last 10 years, including from new listings, follow-on offerings, and other capital raised”.

HLB Mann Judd’s mid-year report on IPOs noted that much of 2024’s financial year (FY) IPO activity was constrained by the high interest-rate environment and subdued economic climate in Australia.

The 2024 IPO calendar is lacklustre to say the least, with just 13 listings in the six months to June, one fewer than in the first six months of 2023.

Partner corporate and audit services at HLB Mann Judd, Marcus Ohm, said in the July report that “uncertainty persists regarding the point when the market will see a sustained recovery in volumes and funds raised”.

“Whilst the float of Guzman y Gomez in June was fully subscribed and enjoyed first day and period-end gains, there are not yet any significant volumes in the near-term pipeline, with only four upcoming listings registered with the ASX, three of which are materials companies. The extent of any wider recovery in IPO volumes and sentiment remains to be seen, given current economic issues and inflationary concerns.”

An IPO essentially involves offering the shares of a private corporation to the public for the first time through a new stock issuance. This creates an opportunity for a company to raise capital from public investors.

The first step involves the company setting its financial goals, how much it needs to raise at the IPO, the securities it will offer, and its initial listing price.

The Stages of an IPO

A retail investor needs to prepare a prospectus, which is lodged with the Australian Securities and Investments Commission (ASIC) for approval. If the company is also aiming to be listed on the ASX, it will need to be lodged with the ASX.

“A prospectus is usually a lengthy document that outlines the business and its financials,” says Warren.

Once the approvals process is completed, investors will carry out an evaluation of the company. Ideally, this will be a fair sum.

“Let’s say an investment bank decides that a business is worth $100 million,” explains Warren. “The number of shares divided by $100 million give you the listing amount of shares. It is then the job of the investment bank to go out and sell the shares.”

The investment bank does a ‘road show’ whereby they go to institutional investors and retail investors, who will hopefully read the prospectus, or their stockbroker or financial advisor will say recommend that their client invest in the company.

Sometimes the shares will be snapped up quickly, however the process usually takes between four and six weeks to complete.

The stock exchange will then provide a date for the listing. On that day at 11am, the stock is listed and the market determines whether it was the correct price.

When a company transitions from private to public, private investors have a chance to benefit from their investment because it typically includes a share premium for existing private investors. It also allows public investors to participate in the offering.

Investors are keen to buy shares for the first initial share price, because if the price increases—and it should do in theory—their shares will also be worth more. The underwriters who set the price typically discount it to ensure success on the IPO day, although they will also factor in demand levels.

“Technically, if it’s a good company, the share price should go up,” says Warren. “But there’s plenty that go the other way quite quickly.”

IPOs can be expensive because the transaction process requires investing funds to meet the ongoing regulatory compliance requirements. Money will also be spent for public companies on an underwriter for the transaction, along with an investment bank, and an advertiser to spread the word about the offering.

If the price decreases, those who purchased the shares will lose money.

“If you run a very successful private business that is paying yourself and your (private) shareholders dividends, there is no reason to list unless you want a liquidity event,” says Warren.

Once a company goes public, it is owned by the shareholders who have bought its stock, and it has less autonomy than it used to. Some company owners—and especially founders—may prefer to maintain control of the direction of their company while incoming CEOs may opt to take a listed company private.

The most recent high-profile recent example of this was Elon Musk taking Twitter/X private when he took over the social media giant—and proceeded to fire 6,000 staffers or some 80% of the workforce.