Dash for Cash

(adapted from the Dragonfly Fund Monthly Update - November 2019)

In the current investment climate, there appears to be a fatal attraction to the next new shiny toy - be it IPOs or capital raisings. But we are very sceptical of the merits of many of the deals on offer. There has been approximately $1.2b raised in the first two weeks of December alone, across 55 ASX-listed companies, according to data from Fresh Equities. Similar activity levels continue at the time of writing, based on the deal flow we’ve seen.

We were interested to read a report ASIC has just released on IPOs in the mining and exploration space. We think the findings are also reflective of what occurs across the broader market:

  • There “can be an environment encouraging a rapid return on the initial investment rather than an investment aimed at the medium to longer term returns”
  • “Promotional materials such as investor presentations, explanatory material and email marketing methods are often subject to substandard compliance controls”
  • “IPO transaction design and structure may inflate market interest in the company in the short term post-listing”
  • “on average, over 14% of IPO investors sold their IPO allocation within five trading days of listing ... after 100 trading days over 50% of IPO investors had sold their entire IPO allocation”
  • The median return turns negative for those who hold their investment for more than 150 days.

Source: ASIC

Dragonfly Fund has been fortunate to participate in a number of very successful IPOs - since the Fund commenced we count eight IPOs that have added value to the Fund and two that disappointed. But we have been very selective.

We look at price, we want to meet the key people, we care about how and by who the IPO is managed. Our intention is to invest for the medium to long term but our discipline around price means that should an IPO surge on the first day to a price beyond our target, we can be expected to sell and reallocate the funds. Should it take three years to get to that target and we continue to have confidence in the investment thesis, we will be patient (subject to more attractive ideas coming along).

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