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The acronym "IPO" refers to an Initial Public Offering, the process by which shares in a company are sold to investors for the very first time. Conceptually there are two parties in an IPO; the issuer, being the company selling new shares, and the investors who buy the new shares. However, because issuers do not know how to best market their shares, an important intermediary emerges in the form of the investment banker, who ultimately profits by taking a fee for selling the company to investors.

As investors we recently considered buying shares in an Australian IPO. An investment banker explained to us that as we don't buy shares in every IPO, we had a slimmer chance of getting the shares we wanted in "the good IPO's". Our investment process is disciplined; companies must meet our investment criteria; and we don't seek to buy shares in new companies just because investment bankers ask us to. While our investors have profited from those IPO's in which we have participated, we were surprised at the idea that there could be "good" and "bad" IPO's, which prompted us to do some research.

We analysed all the Australian IPO's from the beginning of 2014 to late April. Around 40% of these had delivered a greater than 15% annual rate of return from their IPO offer price. So it seems that on average IPO's have been, well, rather average. In contrast 70% of the IPO's in which we have invested have delivered annualised returns above 15%, with particularly pleasing performances from portfolio holdings Medibank (37%) and Link (52%).

Upon reflection we are pleased to be known as choosy investors who participate only in IPO's which suit our investment approach. Recent experience suggests that IPO may in fact now stand for "It's Probably Over-priced"!


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