How to navigate the IPO market (and 2 on the way up in 2022)

There were a whopping 163 initial public offerings (or IPOs) in 2021, up from just 67 in 2020 and 64 in 2019, according to IPO watch. There have already been six in the first month of 2022. But like many things in life, not all IPOs are created equal. 

In fact, the best performing IPO from 2021, Global Lithium Resources (ASX: GL1), has returned 645% since it listed in May. While the two worst, Hiremii Group (ASX: HMI) and Pearl Gull Iron (ASX: PLG) have both plummeted by around 70%. 

So how can you navigate the volatile IPO market, and invest in the good over the bad, or worst, ugly? 

Thankfully, Karen Towle, the portfolio manager of the Tribeca Special Opportunities Fund has shared what makes successful IPOs tick, as well as the red flags investors should look out for before investing in a new listing. 

Plus, Towle also shares two of the largest positions in the portfolio, Playside Studios and GenusPlus, both of which she believes have plenty of upside ahead of them over the months (and years) to come. 

Note: This video was shot on Tuesday 1st of February, 2022. You can watch the video or read an edited transcript below. 

Edited transcript 

How do you and the team distinguish the good from the bad (and the ugly) when analysing IPO opportunities?

Karen Towle: So when we're looking at an IPO, we're always looking at it just as a normal investment. We don't necessarily treat an IPO as any different to a normal investment. So we're looking at things like the industry structure and the management track record and reputation, what are the opportunities to grow, and just what's great about the company and why do we want to invest in it? 

The things that we would love to see in an IPO are founder-led businesses and when that founder stays in the business and continues to have a really good shareholding in the business. And then we really want to see as well, the money that's being raised from the IPO, mainly being put back into the company. And so we want to see that ability for the company to grow and not money just being stripped out of the company.

What red flags should investors look out for when investing in an IPO?

The things that we tend to be quite cautious about are when private equity sells a business into the IPO market. So often, they're only there for a short time, so there's not a lot of responsibility there. And I guess we also often find with companies being sold by PE that they can strip costs out. And so you've got a business that needs to be reinvested in. So we're pretty cautious about that. 

Other areas that I'm also cautious about is if there's a founder that's led the business, and then all of a sudden before the IPO, a corporate CEO has been put into place. And so therefore you can't really trust the track record of the business because you don't know what the new CEO's going to be doing. So if there's a change in management really close to the IPO, then that makes me pretty cautious as well.

The other thing that can happen and the thing I really look at is if there are lots of pro forma adjustments in the P&L, in the prospectus. Because I think that can create a lot of uncertainty in terms of what the real earnings are and I think companies can manipulate things quite a bit when they do lots of pro forma adjustments. So that's another red flag for me.

What are some of the risks investors should be aware of when investing in this area of the market? 

When it's a new company and a new listing, you just don't have the track record there. So you really are relying on management and the prospectus to give you a good feel for what's happening within that business. And so sometimes, people are pretty good at spruiking. So the promise that is being made to get the IPO away doesn't really eventuate. So I think you've got to look at the prospectus and make an assessment, in terms of how realistic those forecasts are and really, is the industry as good as what they're trying to make it out, because they're definitely trying to sell their product. So you have to be a little bit cautious, I think, and a little bit suspicious. I'm always questioning, "Is that realistic or not?"

Battery material related IPOs were the best performers in 2021. Could we see this again in 2022? 

I think as a house at Tribeca and me personally as well, we think there are so many opportunities in the electrification of the economy industry. And there's going to continue to be all sorts of great opportunities that are going to spring up. And that could be in the resources side of things or technology or infrastructure. So electrification and moving to a carbon-neutral world is going to present so many opportunities. 

Speaking about the lithium stocks, in particular, we do have an investment in a lithium company in the fund. It's called Core Lithium (ASX: CXO). It's done really well. We got it in a placement at 25 cents, and the share price now is 78 cents. I would say that there are definitely pockets of valuation excess. And even though the lithium stocks have done really well, just as much because lithium's kind of trendy, but also because demand has actually accelerated beyond what people were thinking about at the beginning of the year. But I think there is a degree of frothiness in the market in some of those stocks. And so you have to be very careful where you invest.

Are there any recent IPOs in your portfolio that have plenty of upside potential in 2022? 

Two of the biggest stocks in the portfolio are stocks that IPO-ed at the end of 2020. One of them is a company called PlaySide Studios (ASX: PLY), which is a gaming development business. It is everything that I said before about what I look for in an IPO. So founder-led, the founder's still got a major part of the business. They've raised money since the IPO to continue to grow. All the money is going back into the business and they're hiring lots of developers and taking the world by storm. 

So they do both work for hire and they also develop their own games. So they've recently won a contract for a company called 2K Games, which is a big gaming business in the US. I think it's got over a $20 billion market cap. And they also do work for Facebook. And then in addition to that, they're developing some really interesting games by themselves. And if those games come off and they're starting to be monetized this year, then I think the company's worth a lot more money.

And in addition to that, you've just seen Microsoft take over Activision and it's put an absolute rocket under good gaming development houses. So I think PlaySide is in an absolutely fantastic position to continue to do really well this year.

The second stock I really like in the portfolio is a company called GenusPlus (ASX: GNP). Like PlaySide, it has all the attributes we are looking for when it IPO-ed - founder-led and raised money for growth rather than taking money out. Started in Western Australia. It's a business that invests in poles and wires, electricity and communication. It's got really big contracts and a great reputation in the Western Australian market with Western Power and a lot of the big mining companies. They've used the money from the IPO to come over into the Eastern states. And they've made some acquisitions over here. And the big opportunity for GenusPlus is the fact that we are moving to electric vehicles and the whole electricity network in the Eastern states, in particular, is really old. It's over 20 years old and it's run down. And it won't be able to cope with all these new electric vehicles that are coming into the economy.

And so I've actually heard that if you've got a street and there are more than three electric vehicles, then the network can't cope with fast charging stations. So upgrades have to happen and GenusPlus is in just a fantastic position to take advantage of that.

You can stay up to date with all of Karen's high conviction ideas by following her profile here.

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