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

Ray Dalio on 2025’s real story, Trump, and what’s next

The renowned investor says 2025’s real story wasn’t AI or US stocks but the shift away from American assets and a collapse in the value of money. And he outlines how to best position portfolios for what’s ahead.

Making sense of record high markets as the world catches fire

The post-World War Two economic system is unravelling, leading to huge shifts in currency, bond and commodity markets, yet stocks seem oblivious to the chaos. This looks to history as a guide for what’s next.

3 ways to fix Australia’s affordability crisis

Our cost-of-living pressures go beyond the RBA: surging house prices, excessive migration, and expanding government programs, including the NDIS, are fuelling inflation, demanding bold, structural solutions.

Is there a better way to reform the CGT discount?

The capital gains tax discount is under review, but debate should go beyond its size. Its original purpose, design flaws and distortions suggest Australia could adopt a better, more targeted approach.

How cutting the CGT discount could help rebalance housing market

A more rational taxation system that supports home ownership but discourages asset speculation could provide greater financial support to first home buyers.

Welcome to Firstlinks Edition 648 with weekend update

This is my last edition as Editor of Firstlinks. I’m moving onto a new role though the newsletter will remain in good hands until my permanent replacement is found.

  • 5 February 2026

Latest Updates

Property

The 5% deposit scheme is bad for homeowners and Australia

An ‘affordability’ scheme making the county more vulnerable to economic shocks and contributing to the deteriorating financial situation of everyday Australians.

Investment strategies

Is defensive the new offensive?

Relatively boring, unglamorous, defensive stocks like Kroger and Allstate have quietly outperformed gilded tech giants, offering steady growth, visibility, and resilient returns in a market captivated by AI and flashier industries.

Shares

How the RBA scores on its inflation goal

The Reserve Bank continues to face criticism from all sides. A reminder of the RBA's mandate and a review of their track record in maintaining price stability since the early 1990s.

Investment strategies

Levered credit: A late cycle ingredient for drawdown pain

As credit spreads normalised through 2025, yield‑hungry investors have turned to leverage for high returns, uncomfortably echoing pre‑GFC behaviours. Investors need to be careful to understand the true risk‑return trade‑off.

Planning

The more things change… longevity just goes on increasing

Australia needs a major shift in longevity awareness, attitudes and behaviour if, as a community, we are to reap the benefits of increasing longevity. Adopting a national strategy is well overdue.

Property

The improving outlook of Australian commercial real estate

The sector is positioned to benefit from defensive and resilient income streams supported by embedded rental increase opportunities. 

Property

Seize hidden opportunities among 50+ home buyer schemes in Australia

There is a laundry list of government schemes to help Australian's struggling with housing affordability. Savvy buyers should take advantage to break into the property market.

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.