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How pre-IPO and private market funds avoided the selloff

Perennial tops pre-IPO charts as sub-sector outperforms
Pre-IPO funds are popular with early-stage, pre-profit tech businesses looking for a longer runway ahead of their ASX listing.
 Fund ManagerFund Name1 year*
1Perennial Investment Partners LimitedPrivate to Public Opportunities 152.59%
2Perennial Investment Partners LimitedPrivate to Public Opportunities 218.44%
3Ellerston Pre IPO TR in AUPre IPO3.07%
4Perpetual LimitedPrivate Australian Share-5.45%
5Antares Elite Opportunities Professional TR in AUElite Opportunities Professional-6.32%
6Russell Australian Opportunities A TR in AUAustralian Opportunities-6.49%

In the land of “pre-IPO funding,” capital raised by a company in the lead-up to its planned IPO is generally priced at a discount to the IPO price. Pre-IPO funds are popular with early-stage, pre-profit tech businesses looking for a longer runway ahead of their ASX listing.

Of course, when a company undertakes a pre-IPO raising, there is no guarantee when or if the company will undertake an IPO, or what the IPO share price will be. Investors need to know that there is a high risk in pre-IPOs but to reflect this, there is a higher discount to those that buy-in on the pre-IPO.

Taking out the top two spots with a return of 52.59 percent and 18.44 percent were Perennial Investment Partners’ Private to Public Opportunities Funds 1 and 2. Known primarily for its value stock-picking prowess, the fund is a unique proposition from the group in a sector of the market that remains ripe for active management.

  • It is a closed-end strategy, operating for five years, allowing the management team to deploy capital with patience and confidence. And it seems to have paid off. The fund targets both private and public markets and companies expected to mount an IPO in one to two years’ time. And that is Perennial’s competitive advantage, having operated in the sector for many years and built extensive relationships with key players across Australia.

    The Private to Public Opportunities Fund (PPP1) returned 24.1% (net of fees) for the year. Since its inception in August 2019, PPP1 has returned 163.1%. Perennial says, “PPP1 was positively impacted during the quarter by a large uplift of the valuation for Animoca Brands – a private growth-stage business. To manage our position size, we sold a portion of our holding at this price, with the cash proceeds received in April 2022.”

    Animoca Brands is a leader in digital entertainment, blockchain, and gamification that is working to advance digital property rights and contribute to the establishment of the open metaverse. The company develops and publishes a broad portfolio of products including the REVV token and SAND token; original games including The Sandbox, Crazy Kings, and Crazy Defense Heroes. Another company in the portfolio was medical laboratory company Microba, which listed on the ASX in April 2022 at 45 cents a share, providing a small uplift on the holding value for PPP 1 and PPP 2. The Private to Public Opportunities Fund No.2 (PPP2) returned 18.44% (net of fees) for the year, boosted by the Animoca Brands and Medtech share price rises.

    However, it wasn’t all good news as Perennial has warned that there has been a significant slowdown in IPOs.  The fund manager said, “We remain cautious on this sector of the market. Since the global COVID sell-off in early 2020, new IPOs on the ASX have delivered mixed success. On our analysis, approximately 75% of the 20 largest domestic IPOs over this period are now trading below their issue price. This reflects the quality, pricing and structure of these transactions, as well as a volatile equity market. As a result of lower market sentiment currently, a number of our Pre-IPO investments have decided to delay their ASX listing until conditions improve.”

    In recent years, IPOs have been a great place to raise money for technology businesses especially during the pandemic. You only have to look as far as companies such as Afterpay, WiseTech and Appen. The IPO market in 2021 recorded the highest number of new floats in a decade, more than the previous two years combined.

    Nearly half of the listings in the first half of 2021 came from the resources sector, propped up by booming commodity prices, low interest rates, buoyant stock markets, and an insatiable thirst for high-valued growth companies. These factors helped drive companies to take advantage of a thriving IPO market. Australia recorded a total of 240 companies listed in 2021, up 159 percent from the previous year.

    In contrast, many of the favourable drivers that helped boost the IPO market in 2021 have faded away and haven’t materialised in 2022. After two fantastic years, the IPO market has seen a dramatic slowdown in activity that is yet to show any signs of a recovery; despite this, performance of the pre-IPO sector has remained strong.

    Ishan Dan

    Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.

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