Tough market conditions pour cold water on Firetrail IPO
Firetrail's withdrawal of its listed investment company this week IPO embodies the difficulties of a finite pool of investors and tougher market conditions.
Firetrail's withdrawal of its listed investment company this week IPO embodies the difficulties of a finite pool of investors and tougher market conditions.
The team of ex-Macquarie Group fund managers had targeted a minimum investment of $73.5 million for the IPO, up to a maximum of $500 million.
On Tuesday this week, Patrick Hodgens, Firetrail's managing director said that while it was "pleased to have exceeded the minimum investment amount … our analysis indicated there was significant concentration risk in a small number of investors who would have owned a large proportion of the company.”
In response to this, the company board decided to withdraw the offer.
The small number of investors saw the IPO pulled, despite hitting its minimum dollar target
LICs that lack a diversified shareholder base are generally at a higher risk of the share price trading at a discount to the company’s net tangible assets.
Hodgens says feedback from its broking syndicate, through which the LIC was being marketed, indicated the "large number of large LICs brought to market over the past year … had an impact on the capital raise".
"We were comfortable in the size of the overall expected size of the raise, however, our key concern was the concentration in the top shareholders of the company.
“We believe that a more concentrated shareholder base increased the liquidity risks in the LIC, and the risk of the LIC trading at a discount to NTA (net tangible assets).”
Morningstar's Alex Prineas, associate director, manager research, reiterates Hodgens view about the high number of listed vehicle launches in recent years, including LICs and exchange-traded funds. "And there's only a finite amount of investor dollars to go around," he says.
“We've seen a 'winner-take-all' phenomenon, where a small number of products with the brand name, track record and attractive launches are getting the majority of the investors", Prineas says, rather than money spreading across the array of products on offer.
Firetrail itself had no track record, having originally offered an institutional fund before launching a retail offering around six months ago. Many of the investors followed Hodgens and his portfolio management team across from Macquarie, when they spun out and partnered with the multi-affiliate fund manager Pinnacle group in March 2018.
How market volatility played a role
Hodgens cited the tough market conditions as a factor behind the withdrawal of the IPO.
The LIC was formally announced in September, and since 8 October the share market has declined more than 4 per cent.
"Uncertainty and volatility can have a material impact on company IPO raises, and we saw this at the final stage of the LIC IPO raise," Hodgens says.
Prineas says this would have had an impact. "But they couldn't have known what the market was going to be doing in advance, though it always makes it a lot harder."
Prineas also notes Firetrail's LIC isn't the first IPO to fail in recent times, pointing to PM Capital's attempted launch of redeemable securities linked to its Global Opportunities fund earlier this year.
Known as PTrackERS - short for Portfolio Tracking Exchangeable Redeemable Securities – PM Capital had targeted between $105 million and $491 million. This was to have culminated in a LIC, Go 2025, whose name alluded to the end date.
While Firetrail's attempt at least hit the minimum investment amount, PM Capital closed its offer after it failed to reach the minimum subscription level.
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Glenn Freeman is senior editor, Morningstar Australia
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