Will the surge in IPO activity lead to a supply-and-demand problem?

The New Zealand Stock Exchange has admitted several new listings in the past six months, with more pending including Gentrack, PushPay, Hirepool and iksGPS. Rumours abound that several other companies are hatching plans. The Initial Public Offering (IPO) is a popular option if new capital is required for growth or if the owners want to sell down. However, it is also an expensive instrument.

Investor and commentator Brian Gaynor has suggested that the current surge in listings in New Zealand is a good thing. It may be, but I'm not so sure—because the grown-up world of public share trading is ruthless. If value is to be realised, the IPO needs to be heavily subscribed and performance needs to be at or above the expectations created in the IM. Otherwise, a key driver to list—liquidity at a fair price—will be lost, as Moa found out recently.

While IPOs are popular at present, the current surge in activity may lead to a supply-and-demand problem. The supply of offers is bound to exceed demand from investors at some point. Inevitably, advisors will struggle to attract sufficient interest to fill the initial subscriptions, and that will put the share price under pressure. Boards need to think carefully about this before they decide to take an IPO proposition to shareholders. It may be smarter to use debt (or some other instrument) to fund growth.