Company floats on the ASX are fuelling billions of dollars of wealth — but what exactly is an IPO?

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More than $8 billion has changed hands, or more accurately bank accounts, on the Australian Securities Exchange (ASX) each trading day this year.

An unusually large number of private companies have gone public, challenging long-held records for the number of listings and money raised.

While people who've never bought shares have invested in Australian companies for the first time.

"This is a record year by number of listings since 2007, and it's also a record year in terms of capital raised since 2014," says Max Cunningham, group executive of listings at the ASX.

About 200 companies will have gone public by the end of this year.

It's the first year to rival the previous record, set at the height of the mining boom in 2007, when 251 companies launched on the ASX.

"But, perhaps most importantly, for us, it's an all-time record for a number of companies listing with market capitalisations over $1 billion," Mr Cunningham tells The Business.

"We've seen eight companies list this year with billion-dollar market capitalisation."

CommSec senior economist Ryan Felsman says it's no surprise companies are positioning themselves for future growth.

"They're looking to bolster their balance sheets," he explains.

"At the same time, they're looking to take advantage, opportunistically, of some other rivals that are potentially struggling at the moment, in particular ones that have had impacts from government restrictions which could weigh on revenue and earnings."

Why has there been so much activity on the ASX this year?

The simple answer is cheap cash. 

Investors and business owners alike want to make money, and government and central bank policies since COVID-19 have made share markets some of the best places to do that.

As investors pile their cash into the stock market, instead of bank accounts that aren't delivering much return, companies are benefiting.

Previously, privately owned companies have jumped on the public-listing bandwagon in a bid to benefit from all that extra cash in the market.

"It's a global phenomenon — it's not just linked to Australia," Mr Cunningham explains.

"I think it's a reflection of a lot of the governments pump priming, low interest rates, that we've seen money going into the economy from central banks and we're seeing this in the US, across Europe and in Asia as well.

"The capital market and hopefully shareholders are beneficiaries of that."

Research by finance firm EY shows about 1,600 companies globally have floated this year.

"That is certainly the strongest we have seen globally since 2017," Mr Felsman says.

"As vaccination rates increase and the global economy continues to reopen, we're expecting to see economic activity build, and companies are looking for organic growth or looking to certainly focus on the growth options going into that strength."

What is 'going public'?

When a company "goes public" (you might also hear this described as when a company "lists" or "floats") anyone can buy a piece (or share) of that company.

The first time a company does this is during its initial public offering (IPO).

From then on, investors can buy and sell shares in that company for as long as it remains a public company.

With so many investors keen to spend their money trading shares, there hasn't been a better time for a business that's been thinking of going public to list for the first time.

Nickel explorer Nimy Resources has raised $6 million ahead of its IPO today, Nimy Resources managing director Christian Price tells The Business.

"We're going public so we can get access to the capital to then do more exploration work," he says.

Nimy believes it's discovered a new nickel deposit in Western Australia.

It needs more money to keep exploring and assessing what it finds.

"We've got a lot of areas that are undercover so we're using geophysics and drilling to find the higher concentrations and higher grades of nickel sulphides, to then look at defining an economic nickel sulphide resource," Mr Price says.

Demand for nickel, a key component in batteries, is growing as the world electrifies and Nimy wants to enter that lucrative market.

It listed at an opening price of 20 cents a share.

In 2007, Australia's IPO boom was led by mining and the same sector is driving the rush again this year.

"We're seeing the biggest recovery in the mining sector in over a decade," Mr Cunningham says.

"58 per cent of the companies that are listing have been in the mining or materials space."

He says the rest of the growth has been across the board but weighted toward tech and health-related companies.

How does a company go public?

"Going through the IPO process has been an interesting exercise," Mr Price says.

"You need to find your independent experts in terms of geology, people who've got specific knowledge of nickel sulphides, which in WA has been increasingly rare to find.

"Then you need to start building your team with your lead manager,  your legal team and also with your board and management to get all that mix right.

"It's not that easy."

Going public requires a large range of checks and balances by the Australian Securities and Investments Commission (ASIC) and the ASX.

Having the right people working on the process can help streamline that. 

ActivePort, a telecommunications company that produces software to connect people around the world, worked on its IPO for 12 months before the big day in October.

"It was longer than I expected, but it's long for a reason," ActivePort managing director Karim Nejaim tells The Business.

"There are a lot of shareholders investing their money or their clients' money.

"This is a serious business and so I think the checks and balances are necessary."

Foremost among all the paperwork required is the company's prospectus.

The prospectus outlines everything there is to know about the business: what it is or does, how it's managed, its balance books, plans for the future, and what it will do with the money it's raising from the IPO.

With each share valued at 20 cents, ActivePort raised $12 million in its IPO. It plans to use that money to grow its business globally.

"The share price hung around the listing price for a short period and has now dropped away slightly, so what we're finding is the market is now saying, 'OK, we understand what you're doing, we understand the way you're going to do it. Show us the numbers.'"

It's not unusual for share prices to fall following an IPO, after the hype and fear of missing out die down.

"Now the real work starts. Let's hit the promises and let's give the market confidence where we're taking this," Mr Nejaim says.

What's in it for shareholders

Everyone in this scenario wants to make money.

Sometimes investors have to wait for that return.

As time goes on and a company begins to deliver on its milestones, more investors might want to buy in.

With more demand, and as the company delivers results, the share price is pushed higher.

So that initial investment at 20 cents a share might later be worth 40 cents, $4 or $40 a share. There is no limit to what market pressure can do to a share price.

Investors make money by selling their shares for more than they paid for them.

Although it can often work the other way, with shares falling in value from their IPO level and not recovering.

Myer is a well-known example. It floated in 2009 at $4.10 a share, but has never traded above that and is now worth about 50 cents a share.

But the other way to make money on shares is with dividend payments.

If a company is doing well, it passes on some of that windfall to shareholders.

That's certainly been the case this year.

Analysis by global asset manager Janus Henderson shows Australian dividends have grown four times faster than the rest of the world.

It says third-quarter payouts in Australia rose by 126 per cent to a record $41.9 billion.

Globally, dividend payments increased less than a 10th of that, rising 11.3 per cent.

Most of that growth came from the mining sector, which ​​​​​​delivered $25.4 billion in dividends in quarter three, thanks to record commodity prices.

The world's biggest miner, BHP, is set to become the world's biggest dividend payer in 2021, with the combined payouts of its UK and Australian divisions hitting $25.6 billion.

Will this amount of ASX activity continue?

The momentum on the ASX doesn't appear to be abating as we head into 2022.

"We're very optimistic in the short term," Mr Cunningham says.

"We see nothing that slows the market down.

"We begin calendar 2022 with the biggest listing the ASX has ever had, in the form of Square, that will be listing as a result of its takeover of Afterpay."

Payment platform company Square bought Afterpay, offering $126.21 per Afterpay share.

It was a significant increase on its 2016 IPO price of $1 a share.

Square's entry into the ASX via its acquisition of Afterpay is likely to happen in early January.

It's not strictly an IPO but it will set 2022 off to a solid start in terms of capital on the ASX.

"I think there's a lot of room for optimism at the moment," Mr Cunningham concludes.

Mr Felsman isn't as confident.

"It's going to be difficult to continue the momentum given it's been so strong, and of course we may see a bit more of a normalisation in business confidence and conditions into 2022."

But he expects there will continue to be growth in stock markets due to e-commerce businesses

"There are conditions or situations perhaps whereby these companies may look to go from privately owned to publicly listed companies," he says.

By business reporter Rachel Pupazzoni (Original ABC Article)