Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 230

IPOs, information asymmetry and house prices

One of the reasons I generally don’t buy into company floats (initial public offerings or IPOs) is a little thing called information asymmetry. This term was popularised after George Akerlof (US Federal Reserve chair Janet Yellen’s husband) wrote a paper in 1970 about the used car market entitled 'The market for lemons'. It earned him a Nobel Prize in 2001.

Why sell a good company?

It’s a fancy term for a simple idea. If the seller of an item is singing its praises, why would they want to sell it? They are the ultimate insiders so they must be selling it for more than what they know it is really worth. The owner knows much more about it than I do? Before I buy anything, I stop and ask myself: What does the seller know that I don’t? If it’s such a good company, why don’t they want to keep it or buy more?

Company floats are an example of how this can often lead to bad outcomes for unwitting buyers, especially where the owners are taking cash out of the float. In some floats, the vendors are the founders, and at other times they are private equity firms seeking to offload their stake for a profit. Dick Smith and Myer are prime examples.

When a company floats, the founders are the ultimate insiders. They have spent years learning everything they possibly could about the company, the market, competitors, profitability, cash flows, assets, liabilities, the outlooks for supply and demand - much more than I could possibly ever know. If they know all of this and they come to the conclusion that they want to sell it, why would I want to buy it?

There are several cases of good floats where the vendors cashed out, notably when governments sell for strategic reasons or because they can’t afford to keeping injecting the capital required for growth. Commonwealth Bank and Cochlear were outstanding successes for investors in their floats. But not all government sell-offs are good. Telstra is a prime example of the government taking advantage of a crazy bubble market to sell out at ridiculous boom-time prices that never made any fundamental sense.

IPOs of private companies can tell us a lot about how the founders/vendors view its prospects. Look at what they do rather than what they say. In the case of the float of mortgage lender RAMS in 2007, nobody knew more about the mortgage market, the bad debt cycle, and the internal books of RAMS than founder John Kinghorn. In the float, he pocketed $650 million cash at the top of the mortgage market just before the sub-prime crash. Within weeks, RAMS issued profit downgrades and corrections to its accounts. Within three months, the share price fell 90%. The New York Times called it the ‘worst IPO of the decade’.

Kerr Neilson floated his funds management company Platinum at the top of the boom in 2007 right before the GFC crash. It was a stroke of market-timing genius. The $5 IPO price was hyped up to $8.80 on the first day of trading, but the very next day it started an almost straight line 70% decline to $2.75. It is still below its high more than 10 years later.

What about the Sydney housing market?

Not many people know more about residential property than John McGrath. He picked the perfect time to pocket $37 million in cash when he floated his McGrath real estate agency in December 2015. If he was bullish about housing, he would have kept his company. The share price peaked at $1.88 the day after it listed and the very next day it started its almost straight line 70% slide to where it is now. The market cooled, regulators introduced new controls to slow lending and clamp down on foreign purchases, and banks raised rates.

I have missed out on a few of good IPOs over the years, but I have avoided hundreds of duds by watching what people do rather than what they say. Successful investing is mostly about not blowing up your money in the duds.

 

Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is general information that does not consider the circumstances of any individual.

RELATED ARTICLES

ASX plans to attract more IPOs don’t go far enough

How ETFs and indexes cope with company delistings

Is DDO change to hybrids a drawback for investors?

banner

Most viewed in recent weeks

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Why we should follow Canada and cut migration

An explosion in low-skilled migration to Australia has depressed wages, killed productivity, and cut rental vacancy rates to near decades-lows. It’s time both sides of politics addressed the issue.

Are franking credits worth pursuing?

Are franking credits factored into share prices? The data suggests they're probably not, and there are certain types of stocks that offer higher franking credits as well as the prospect for higher returns.

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Latest Updates

A nation of landlords and fund managers

Super and housing dwarf every other asset class in Australia, and they’ve both become too big to fail. Can they continue to grow at current rates, and if so, what are the implications for the economy, work and markets?

Economy

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Retirement

Retiring debt-free may not be the best strategy

Retiring with debt may have advantages. Maintaining a mortgage on the family home can provide a line of credit in retirement for flexibility, extra income, and a DIY reverse mortgage strategy.

Shares

Why the ASX is losing Its best companies

The ASX is shrinking not by accident, but by design. A governance model that rewards detachment over ownership is driving capital into private hands and weakening public markets.

Investment strategies

3 reasons the party in big tech stocks may be over

The AI boom has sparked investor euphoria, but under the surface, US big tech is showing cracks - slowing growth, surging capex, and fading dominance signal it's time to question conventional tech optimism.

Investment strategies

Resilience is the new alpha

Trade is now a strategic weapon, reshaping the investment landscape. In this environment, resilient companies - those capable of absorbing shocks and defending margins - are best positioned to outperform.

Shares

The DNA of long-term compounding machines

The next generation of wealth creation is likely to emerge from founder influenced firms that combine scalable models with long-term alignment. Four signs can alert investors to these companies before the crowds.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.