Backdoor listings are dead and resource stocks are the new black in the fast moving small cap initial public offering (IPO) market following a period of upheaval caused by changes to the ASX listing rules.
Those are the key conclusions to be drawn from the latest analysis of the IPO market by accounting firm HLB Mann Judd. The firm, which has good connections in the small cap IPO hotbed of Perth, has been publishing an annual analysis of the IPO market for a decade.
Partners at the firm, Simon James and Jude Lau, say that the forecasts of doom and gloom following last year's changes to the ASX listing rules were exaggerated.
Proof that the tougher listing rules have not caused irreparable harm to entrepreneurs trying to access capital through the ASX can be seen in the latest pipeline of IPOs on the ASX website.
The data shows that at the start of this year about 25 companies have applied for listing on the ASX. That is up about 15 per cent on the same time last year.
These new companies are seeking to raise about $200 million according to analysis by HLB Mann Judd. The bulk of that is being sought by one company, the India Fund Ltd.
The notable aspect of the IPO pipeline in early 2017, according to James and Lau, is the revival in interest of resources companies. That marks a significant change from 2016 when tech-related companies accounted for about a third of IPO listings.
Solid support for small cap firms
The total amount of equity capital raised through IPOs in 2016 was $7.5 billion, which was up 7 per cent on 2015. HLB Mann Judd's partner corporate services and audit, Marcus Ohm, says 2016 was characterised by a balance between large and small companies and representation from about 20 industries.
Ohm says in previous years small cap companies struggled to meet their subscription targets. In 2016 the support for small cap companies was solid with an average over subscription of 21 per cent.
Investors were rewarded with reasonably strong performances from small caps in 2016. About half of new listings in 2016 ended the first day at a premium to the issue price.
The fear and loathing about the new ASX listing rules, which tightened the criteria for listing in relation to assets, profits and market cap, turned out to be over done according to the HLB Mann Judd partners.
Lau says the ASX's emphasis on vetting the quality of businesses and ensuring experienced directors oversee new listed companies has been positive for the market.
However, James admits the new listing rules have, in effect, killed backdoor listings, which are also known as reverse takeovers.
Backdoor listings provided an opportunity for resources companies to be transformed into tech companies. A total of 69 companies raised $368 million and listed through backdoor listings in 2016 compared with 58 companies that raised $330 million in 2015.
Backdoor listings were most prevalent among small cap companies.
Tougher times for entrepreneurs
Lau says the new ASX listing rules have made it much tougher for entrepreneurs wanting to seek capital on the ASX to use existing dormant companies.
There are several barriers to listing via a reverse takeover. These include the high costs of advisers, negotiating the payment required for the existing vehicle and the requirement to hold a shareholder meeting to approve the deal.
One of the main advantages of a backdoor listing is that early investors can achieve returns of more than 100 times their initial investment. This is much harder to achieve when going through the normal IPO process with a prospectus.
While the ASX has made it harder for entrepreneurs to access capital through the exchange traded market the changes are likely to result in higher quality companies.
Entrepreneurs who are patient could well wait to see the final shape of the federal government's crowd funding proposals, which are likely to emerge in the first half of this year.
