Australian IPO Review 2021: Key themes

2021 in review

There was sustained economic recovery in Australia in 2021, assisted by the deployment of Covid–19 vaccines, high levels of liquidity and ongoing policy stimulus.

From an investor perspective, 2021 also saw a significant number of share buybacks and special dividends, as well as unprecedented levels of public M&A activity. These factors all contributed to demand for investment opportunities in 2021.

From an issuer perspective, the fact that 2020 was a quieter year for corporate activity, combined with economic recovery in 2021, meant that corporations shifted their focus from capital preservation to capital deployment to fuel growth while the cost of funds / interest rates remained low.

2021 was also a record year for billion–dollar IPOs (even though a number of potential IPOs in this category, including Scientific Games, became trade sales). These included GQG Partners which listed with a market capitalisation of $5.9 billion, APM Human Services which listed with a market capitalisation of $3.3 billion, Judo Capital which listed with a market capitalisation of $2.3 billion and Ventia which listed with a market capitalisation of $1.45 billion. Herbert Smith Freehills were involved in each of these IPOs. 

ASIC’s continued focus on forward–looking disclosure in a time of Covid–19

Unsurprisingly, given the ongoing impacts of the Covid–19 pandemic, ASIC continued to be focused on forward–looking disclosure in prospectuses, engaging with issuers and their advisers to understand how forecasts have been built up, the impact of Covid–19 on the particular business and industry and how changes to the Covid–19 situation may impact the business.

ASIC has also raised the issue of including commitments to achieving “net zero” greenhouse gas emissions in disclosure documents. ASIC’s position is that “net zero” commitments and other climate targets can be forward–looking statements for which there must be reasonable grounds, and has questioned some examples.

We expect ASIC’s focus on forward–looking disclosure will continue, as businesses continue to address Covid–19 uncertainties. IPO issuers will need to carefully consider any proposed forward–looking disclosure and ensure that there is a reasonable basis for its inclusion.

Other key regulatory updates

The new financial product design and distribution obligations (DDO) regime commenced on and from 5 October 2021, including some late changes that were made to the DDO regime on 1 October 2021 to address some unintended consequences of the original drafting. See Regulatory Developments for further details.

The regime requires issuers of many financial products (including hybrid securities) to identify a “target market” and distribution conditions with a view to ensuring that investors in the target market are receiving products that are likely to be consistent with their likely objectives, financial situation and needs.

At the date of publication, no public enforcement action has been taken by ASIC in relation to the DDO regime and, although ASIC has not granted a period of “facilitative compliance”, it has publicly recognised that there will be a period of transition and ASIC will take a reasonable approach in the early stages provided industry participants are using their best efforts to comply. Despite this, the regime has led to significant uncertainty and compliance effort.

ASX has also continued to provide updated guidance on the ASX Listing Rules. This has included Guidance Note 11: Restricted Securities and Voluntary Escrow, which has been updated, amongst other matters, to address transactions entered into to avoid or reduce escrow. As escrow commonly applies in the context of IPOs, it is important for issuers to understand ASX’s application of these rules.

See IPOs by the numbers for further details of escrow arrangements in 2021.

See Regulatory Developments for further details of the regulatory developments that affected IPOs in 2021.

Comeback of old economy IPOs

As predicted in our 2020 Australian IPO Review, there was a comeback in old economy sectors that had Covid–19 proofed their business models, including the materials, financial, infrastructure, property and consumer staples sectors.

Businesses with consistent yields were attractive, given the low interest rate environment, and a number of businesses benefited from increased confidence in the Australian economy and IPO market as well as from increased consumer spending in some areas (supported by the decline in international holiday expenditure).

Listings in the materials sector comprised more than 50% by number of the IPOs in 2021 and were predominantly small and mid–market capitalisation companies. By comparison, financial sector listings accounted for the largest share of market capitalisation and value raised. In fact, four of the top ten IPOs by market capitalisation in 2021 were financial sector listings, including GQG Partners, Judo Capital, Latitude and Pepper Money.

While there were a number of new economy IPOs in the technology and e–commerce sectors, these sectors did not experience the same levels of growth as the old economy sectors in 2021.

Dominance of front–end bookbuilds

Marketing and pricing of IPO securities, and certainty of outcomes, is a key concern for IPO vendors.

In front–end bookbuilds, the price for the securities is determined by a bookbuild conducted prior to the lodgement of the prospectus with ASIC and the offering is fully underwritten at lodgement. In the past, front–end bookbuilds have tended to be restricted to small and mid–cap companies, because of the challenges of securing “hard” underwriting for very large offers. Larger offers have tended to be launched on an “open–priced” basis, with the bookbuild and pricing only being finalised at the back–end of the offer, providing reduced certainty to vendors (although also providing the opportunity to capture optimally priced demand arising from investors’ shorter risk period).

Despite the number of large IPOs, and institutional investors generally preferring back–end bookbuilds, the front–end bookbuild structure was popular in 2021, including for a number of larger offers which were originally intended as back–end offers. A number of IPOs in 2021 were originally planned as back–end bookbuilds, but subsequently switched to front–end bookbuilds as the boom in the IPO market meant issuers were concerned to “lock in” demand and secure deal and price certainty. Examples of large IPOs in 2021 which used a front–end structure include Judo Capital, Latitude and Pepper Money. Ventia changed its offer structure to a fixed price offer during the course of the offer to lock in pricing and demand.

By contrast, back–end bookbuild IPOs included GQG Partners (and Ventia prior to its change to a fixed price offer).

Of the IPOs in 2021 with market capitalisations over $100 million, close to 80% were underwritten at the front-end – a significant increase from previous years.