Similarly after the success of the recent partial Government privatisations, global investors have been active in New Zealand stocks, particularly initial public offerings (IPO). As a result, the market is hungry for a wider range of investment opportunities, including new public listings on the New Zealand market.
Companies are just as appealing for their growth attributes as they are for their dividend yield. But growth companies can be hungry beasts, requiring extra capital.
Recently listed fast-growth companies whose stock prices have performed relatively well have had several key ingredients working in their favour, including:
• Engaged entrepreneurial management.
• Quality boards of directors, with governance that is focused on creating a sustainable platform for growth.
• Unique product and service propositions.
• They are already profitable or have a clear path to profitability.
Those that have done less well tend to be businesses that are early in their development phase or where they have not made the transition from private company governance standards to public company governance standards.
Meeting key operating and financial targets included in pre-IPO documentation should be relatively straight forward. But often commercial circumstances change, requiring a change in strategy or approach. Companies need to clearly communicate the revised approach to all investors.
A fund manager's primary duty is to their clients, and protecting and growing client's wealth. Accordingly fund managers need to be discerning about the quality, sustainability and value proposition offered by IPOs.
There is a substantial body of academic research that indicates not all IPOs deliver great outcomes for shareholders that buy into IPOs on listing. Pricing and liquidity have also influenced IPO listing success. Companies that have issued equity at prices that are reasonable relative to market pricing and to comparable listed businesses have generally delivered better returns.
IPOs for New Zealand companies where pricing has been influenced by inflated global pricing or optimistic growth expectations have tended to flounder post listing.
For fast-growth companies to create wealth for investors they often need to think "outside the square" and re-imagine the norm. Investors have to decide whether this "re-imagining" is commercially viable or is hype and hoopla.
The global investment "unicorn" phenomenon - start-up companies with no profitability but billion-dollar valuations - often reflects the current exciting wave of technology. Indeed, the New Zealand market has its own baby unicorn stocks.
In many cases, investors need to be patient and wait for fast-growth companies to develop their businesses and their corporate skill set. Over time, the company stock price will reflect underlying fundamental characteristics.
Fast-growth companies are like tigers - unpredictable and hungry, but beautiful when left in their native habitat. Investing in fast-growth companies is like holding on to a tiger by its tail - the ride might be bumpy, you may get the odd scratch, but it will be exciting and hopefully rewarding.
• Shane Solly is a director, portfolio manager and research analyst at Harbour Asset Management. This column does not constitute advice to any person. harbourasset.co.nz/disclaimer/
