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.

 

  •   7 December 2017
  • 2
  •      
  •   

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

How to minimise tax with a will

Inheritance tax implications in Australia may surprise some, as poor estate planning without proper wills or trusts can lead to costly tax bills and delays for beneficiaries.

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

Meg on SMSFs: The CGT changes don’t impact super but what about Div 296 tax decisions?

New CGT rules could tip the scales in the super vs non-super debate. For those facing the Division 296 tax, the case for withdrawing has gotten more complex. A "comparison rate" tool may help assess decisions.

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

The strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

Welcome to Firstlinks Edition 667 with weekend update

The downfall of the giant and three lessons for investors.

  • 18 June 2026

Latest Updates

Latest from Morningstar

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Economy

Was life really better in the good old days?

Are we worse off than previous generations? Lately, there seems to be a heightened level of angst that economic conditions are getting harder and that the two-party political system (and maybe democracy too) is failing voters.

Retirement

Australia has saved $4.5 trillion for retirement. Here's what matters more

Most Australians approaching retirement can tell you the exact dollar value of their super account. But success depends on more than a sizeable balance. Here's four key questions to ask yourself at the start of the financial year. 

Who gains in an AI-supercharged economy?

AI is already reshaping the economy, but companies building transformative technologies rarely capture the greatest long-term value. Instead, those benefits accrue to the users. We may well see this pattern reproduced. 

Taxation

Div 296's million-dollar reset worth $25,000

The 'cost base reset' for the new super tax is being sold as protection for pre-July gains. A worked example shows $1M of protection is worth about $25,000, and the real deadline has not passed.

Latest from Morningstar

The forecasting fix that Wall Street missed

Asking whether markets are overpriced may be the wrong question. New research suggests that traditional valuation metrics used to forecast returns may have been misread. Here are five takeaways for investors.

Investment strategies

Should a fund manager invest their own money differently?

Investors often like the idea that fund managers should invest client money exactly as they invest their own. But reality is more complicated. Unique circumstances make a different approach rational and, at times, beneficial.

Sponsors

Alliances

© 2026 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.