TL;DR

There are currently five initial public offerings (IPOs) slated for the ASX. Three mineral explorers are hoping to raise an aggregate of $31 million between them, one underground mining equipment company based in NSW is seeking $18m, and Pittsburgh based Alcoa is not raising money, rather, it’s seeking to provide ASX exposure to the stock through listing its CDIs.

While this lineup is far from exciting, there has been some recent excitement.

Last week, private equity controlled/authentic Mexican street food vendor, Guzman y Gomez (GyG) went public, and Van Eck's spot BTC ETF feeder fund (VBTC) also made the list. And I hear whispers of another that might join the list, shortly.

Typically, buying from a private equity seller has warnings written all over it, but based on the price action thus far, perhaps GyG is an exception, or maybe it’s too early to tell.

Below are some perspectives on last week’s ASX IPOs, a contrast of two very different Private Equity involved IPOs, and some final thoughts on the macro backdrop for IPOs in Australia.

Fast food IPO GyG - owners in escrow, went down a treat!

Yup, sure did, straight to the crib. Every Zoomer’s favourite Mexican street food vendor, GyG, went public last week through an IPO of its shares on ASX.

GyG shares were offered at $22 to raise growth capital of $335m to expand the Australian footprint.

Despite some negative commentary heading into the IPO, the float was well received, listing at a premium of over 35% and still holding strong on Monday, only slightly down from its high. As of Tuesday’s close, they were holding at $29 per share. Good work.

Whether the >30% premium means it was mispriced, or perfectly priced, is not relevant. What is relevant is how it trades in the weeks ahead and months ahead, particularly after its next earnings announcement.

And that’s quite important because unlike many private equity-backed companies that have undertaken an IPO, the private equity interests in this case have agreed to escrow their shares until the FY25 results have been published. Sure, the IPO delivers a platform for a sell-down, but in this case to the extent there is a sell-down, it will be settled with significantly better ‘price discovery’ once price and liquidity are established after the first few months of trading.

I prefer this method, not just because of the price discovery and liquidity, but because the needs of the business are being prioritised over the needs of the owners. The motivation for the deal is outlet growth, not an initial public sell-down of shares, or what I like to call an IPS.

Time will tell, however appealing to a different category than the other Mexican chains, GyG authentic Mexican street food has so far captured the hearts and minds of customers (Zoomers/Millennials) and so far, investors. If it can continue to grow earnings, achieve scale economies with new roll outs and products, develop a moat and at the same time balance its profit expectations with keeping its franchisees happy and properly incentivised, it could do very well over the long term.

Jury’s out, but a great start.

Not so great IPO - indigestion following IPS

APM initially listed in November 2021, raising $982m at an offer price of $3.55, comprising:

• (65% of the offer) $643 million sell down of existing shares (money going to the selling shareholders, predominantly, Madison Dearborn, and interests associated with the founder and CEO).

• (35% of the offer) $339m in new shares issued (money going to the company and used for fees and growth).

When you see a predominance of sell-down versus new capital being raised, it pays to dissect valuation/pricing, post-IPO skin in the game held by the controllers (versus their sell-downs), remuneration arrangements, and associated elements.

In this case, the after-market judged the pricing to be rich at 16.1x pre-tax ‘adjusted’ earnings and a PE of over 20x. That said, the bulge bracket investment banks involved filled the entire $982 at the November 2021 IPO. The financial press was replete with headlines about the minting of a new Australian billionaire. I remember reading more about that accolade than the business itself. Hmmm?

But as far as price action goes, the stock never traded at or above its IPO price and in July 2022 went into a pronounced downtrend, which by November 2023 had turned into freefall.

By the end of May 2024, APM announced a scheme of arrangement (following an abandoned takeover attempt by CVC Australia) where Madison Dearborn is proposing to buy out the remaining shares it does not own at $1.45 per share. This represents a 74.7% premium to the share price before CVC Australia's failed bid of $0.83 per share.

However, others might see it as a significant 59% discount to the $3.55 IPO price in November 2021, when Madison Dearborn initially sold down along with the founders. Effectively, the buyout fund partially sold down at the IPO at a price that’s more than twice the price at which it is currently proposing to buy back the rest of the company it does not own.

Perhaps the playbook will be to recycle the deal and float it off again at twice the price or more at some time in the future, assuming they can fix the business. Time will tell.

Nonetheless, the APM float and recent proposal is a good illustration of the point, which is that you need to understand the motivation behind any IPO. Consider whether an IPO involves injecting growth capital into the company or refinances high-cost debt via a new share issue; versus buying existing shares to facilitate another party’s exit strategy. If it’s a mixture, you need to follow the money and see to whom (and why) most of the money is going. Always steer clear unless the investment thesis holds up for you.

Otherwise, your face might be ripped off and handed to you on a plate.

Calling all SMSFs - VBTC is now trading on ASX

Van Eck’s Aussie feeder fund (ASX: VBTC) which feeds capital into its U.S. quoted spot bitcoin ETF, hit the ASX board last week.

It traded slightly above its IPO price, which is better than APM, but not as good as GyG. It didn’t generate much excitement (and on Monday/Tuesday got caught up in a crypto correction) but it now provides an ASX on-ramp for Aussies wanting exposure to BTC (albeit, at an expensive fee of 0.59% fee) without having to buy on a crypto exchange and/or hold in a hard wallet.

We will soon see the breakdown of holders, but the tepid response is probably due to major institutional investors that wanted exposure having already sated that demand by investing in one or more of the U.S. quoted spot BTC ETFs that listed some months ago.

As a result, it is likely it will take time for traction. VBTC and others that may follow will probably appeal to audited self-managed superannuation funds that can now hold an exposure to BTC without trying to convince their auditor that they own their BTC (which, is an impossibility, given ‘BTC’ remains on chain and what you actually hold is exclusive access to the underlying by way of a private key). It’s also not been fully established legally whether BTC and crypto are even ‘property’. Investing in BTC via an ETF gets rid of those and other problems, although in the long-term, they are unlikely to provide as high a return vis-a-vis a direct interest.

Macro

While the rate cutting process has started in Canada and Europe, the present higher rates for longer macro backdrop here and in the U.S., is not supportive for IPOs in Australia writ large, although selectively they are doable.

There is also a risk that we may not be at peak rates in Australia, with a further rate hike to come due to sticky inflation and that might also be keeping a lid on excitement levels, despite the wealth effect that it is creating.

Also, if you can get a riskless 5% plus in the bank or invest in a corporate floating rate note or bond that pays between 6% and 7%, why would you go further out on the risk curve? And these yields might even increase to the extent the corporate bond market feels that official rates might need to increase further. In any event, those yields are well above dividend yields, and if rates stay higher for longer, corporate earnings will decrease as a result of less disposable income from consumers, and higher interest bills for geared up companies.

And while shipping costs have risen substantially, the problem in Australia is not the price of imports, it’s the inflation associated with domestically produced and generated items, i.e., non-tradeable inflation that will require new government policies and technology-based fiscal incentives to solve.

As far as the IPO window opening wide, we’re not there yet for all of the above reasons.

Final thoughts

A strong aftermarket performance for GyG could indicate a slightly improving IPO market. However, it feels like a highly selective one. Moreover, if the next interest rate move in Australia is an increase rather than a decrease (or if we remain on pause) expect further withdrawals of liquidity from equity capital markets, a jammed up mainstream IPO window, and more challenges for capital formation - which in turn would logically lead to closures and M&A.

But if the global rate cutting (or trimming) cycle has started, perhaps the right sort of animal spirits will be unleashed in the not too distance future. And then one day, an interest rate pivot, rate go down, price go up and we’re off to the races.

See you in the market.

Mike