The poor results from recent high-profile IPO, Nuix and other well-known brands such as Adore Beauty, are an important reminder that sometimes the best decision is not to invest even when everyone else seems to be. I had multiple clients ask about those companies and others at the time when they were the next hot investment. There are a few simple rules that are worth keeping in mind to help decide if an investment is good for you or whether you might be better off ruling it out. This is especially useful when markets, or a sector of the market, has performed very well, and the market becomes flooded with new opportunities. Personally, if I can find a reason not to invest, a deal breaker of some kind, that’s great. It saves me a lot of time and effort and I can move on the next deal.
With regards to Nuix, my notes at the time in response to client queries include: I am undecided (unconvinced). There are a few issues which make it less attractive than it appears at face value. The IPO/float process appears to have been well managed and structured to maximise the returns on listing day (good publicity, marketing and control of the stock allocations to increase demand). I think businesses in the data industry are complex and difficult to understand business models. Unless we really understand the model, we would keep clear. In relation to the float, they raise only $100m in new funds for the business to grow whereas $875m is existing shareholders selling down. It’s a company where the founders and management own very little of the company, majority are large institutions who invested many years ago. There is a lawsuit pending from one of the original co-founders.
One of the first considerations for me is whether the company being listed is raising money to grow or if it’s effectively an exit. There’s a big difference between a founder raising capital to grow their business to take it to the next level and a large institution taking a company they invested in years ago to the market to sell it. In the first case, the founder will retain as much of the business as possible while raising funds to fuel growth and expansion. In the second case, the institutions may have invested much earlier and are pricing the float at the best possible price to maximise their return. If the majority of the proceeds raised are being used to fund the exit of existing institutional investors, then that’s not usually a great sign regarding their view of its future prospects.
Another area I am very wary of are IPOs led by large private equity firms who have taken over a well-known brand that had fallen on hard times. They buy them cheap and get to work restructuring the business over 2-3 years before re-listing the company on the stock exchange. High profile examples in the last decade that come to mind include Myer and Dick Smith. You’ll often find that while the profit number looks great ahead of the listing, and the turnaround hailed a success, the reality is often that the business hasn’t received the level of the capital investment needed to sustain the performance or the business. It’s only after the sale or IPO that the lack of investment or other issues become a problem and cracks start to appear. Suddenly, six months or a year after the float, the company starts missing their profit guidance and shortly after the share price falls accordingly. So, while new IPOs are much talked about, they are not always as they seem. It is important to look beyond the positive PR and sales pitch and more deeply at the underlying motives of all the stakeholders before committing any capital.
This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.