IPO disasters reopen old wounds of fund managers
However, if the float is intended to monetize past purchases or reduce onerous debt, an investor may have the potential to realize a short-term gain through aggressive marketing, mass numbers, and subsequent trades.
But in the long run, these investments tend to fall into the hiccup category once the escrow period has passed.
According to the manager, some red flags associated with the IPO are short holding periods for suppliers, acquisitions, large dividends and high-profile board appointments just before the IPO.
Changes in accounting methods – in particular R&Capitalization D – and hints of large altogether addressable markets or growth plans that don’t have significant committed capital, also tend to be signs that the float isn’t built to last.
Another IPO mistake, according to a study released by Montgomery small-cap manager Gary Rollo, is investing in “hot topics” in the market. Over the past twelve months strewn with lockdowns, this has included meal kits, ecommerce retailers, and buy now pay later.
He says these floats may look good in the short term, but ultimately the hot money that pursues the deal looks elsewhere and a strong investor base often doesn’t exist at a price close to the IPO price. .
Eye of the beholder
Rollo called two hot thematic stocks that turned out to be failed IPOs: One was Youfoodz which came to market to capitalize on the boom in meal deliveries. It was floating at $ 1.50 but has since lost 70% of its value.
Another was a company that came to market with an arguably unhealthy dose of fanfare and adulation: Internet retailer Adore Beauty. Adore’s IPO was “opportunistic,” Rollo says, as it was acquired by private equity shortly before listing.
The company has lowered its expectations before publishing its annual financial statements, “a sin hardly forgiven by institutions”.
“Adore Beauty is arguably now an illiquid micro-cap that has a long way to go to rebuild its reputation with investors after warning that it is not growing at the rate investors were expecting,” Rollo wrote.
Do IPO Claims Ever Recover? Sometimes a good management team overseeing a decent business really struggles with the transition to public life where there is less tolerance for even small surprises.
It’s worth remembering that Facebook’s 2012 listing was a disaster, so much so that Mark Zuckerberg allegedly transferred his mortgage to Morgan Stanley, who handled the sale (the remarkable revelation is that he had a mortgage).
Closer to home, Collins Foods was an IPO that took the shape of a pear in 2011, with its value more than halving in a year. But it has since proven to be a good long-term investment.
This is waiting rather than the rule, as most failed IPOs languish for years with little attention. And once investors have been sucked into Nuix, it may take a while before they let their guard down again.