Inside the IPO Process with Tom Cowan – an Interview with Equity Mates Podcast



Bryce (01:16):

Welcome to another episode of Equity Mates. It’s a podcast where we help you learn to invest in 45 minutes or less. We break down the world of investing from beginning to dividend so that you can hopefully make some returns. My name is Bryce and as always, I’m joined by my equity buddy Ren, how’s it going bro?

Ren (Alec) (01:31):

I’m very good, Bryce, very excited for this episode. We are going to be unpacking IPO’s initial public offerings with one of the best in the business from one of our favourite funds in the business. Yes. So I’m very excited to get stuck into this episode.

Bryce (01:46):

Absolutely. It is our pleasure to welcome Tom Cowan to the show. Welcome Tom.

Tom (01:51):

Thanks for having me. Great to be here.

Bryce (01:52):

So we’ve got Tom on to, as Alex said, unpack all there is to know about the IPO process from the point of view of our TDM Growth partners. So Tom is co-founder and member of the investment team at TDM Growth Partners alongside his fellow partners, Hamish Collette and Ben Gizz. Tom has grown TDM from 1 million to over a billion in assets under management. So pretty impressive over the years. Thomas sat on a number of several A SX listed companies and was the youngest chairman of an A SX 200 company. So a lot to unpack there, Tom, but firstly, can you just start us off by telling us a bit about TDM?

Tom (02:30):

Yeah, I’d love to. So TDM has been going 15 years and really what we’re about is investing around the world in both public and private businesses. Try and find those best management teams with those businesses with amazing growth profiles and own them for long-term, really be a business owner. And in fact, if you look at what we do, I think on average for 40% of our portfolio, we’ve owned business for 10 years. So when I say long-term, I long-term when think about what we do, I mentioned it before, being a business owner is absolutely fundamental thinking and behaving like a business owner and taking that long-term perspective. And the other thing that is super important to us, which I think doesn’t get played out enough from most investors is people and culture. We are obsessed around finding the right people to run those businesses, make sure we’re aligned and when you found the right people, special people do special things. And that’s what we’ve found time and time again whenever we’ve made mistakes, it’s been around the people. So they’re really some of the key things that we look to and obsess about so to speak.

Bryce (03:36):

So Tom, for our listeners who haven’t perhaps joined the dots, we did have your brother, ed Cowan on the show. Great interview talking about everything that TDM has to offer and a bit more about your investing process. So if you haven’t listened to that episode, we suggest going and listening to that again.

Tom (03:51):

Yeah, no, you can get much more details there about TDM in terms of how we approach things. It was great to have Ed on the show. I actually, I sort of lost my name for about five years when he was playing cricket for Australia and was just introduced at board meetings or other meetings as Ed counts brother and as I like to say, now I’m mid count boss.

Bryce (04:11):

Love it. We’ll go and check that out. It was a great episode.

Ren (Alec) (04:14):

Now Tom, one of the reasons we’re particularly excited for this episode is we’re going to be talking about IPOs, but we’re not just going to be talking about them in abstract terms. You’ve helped some pretty notable companies through the IPO process, Pacific Smiles, baby Bunting, tarot payments. So we’re keen to unpack the IPO process and talk about the experiences that you’ve had with some of these companies that a lot of people are aware of. Bryce in particular is the number one fan of Baby bunting in Australia. Anyone can challenge him on that. He’s number one.

Bryce (04:47):

Number one ticket holder.

Ren (Alec) (04:48):

I guess we want to approach it with a bit of a timeline structure. There’s a lot of work that goes in before the stocks start trading on the A SX. So to begin with, how far out from actually listing on an exchange does a company begin preparing for an IPO? We

Tom (05:04):

Always say it’s a two year process to get ready for RPO. A lot of people that you see looking to list a business do that far quicker, but in our view to make sure you are IPO ready and that you are going to be successful as a public company, we think it’s a lot of work over two years to make sure you’re IPO ready

Ren (Alec) (05:23):

In that two year period, we’ve sort of broken it up into the 24 months out to six months out period and then six months to go live, period. So if we start with at the beginning 24 months out company’s growing, it’s got good prospects, it decides that it wants to go public. What are some of the things that a company and company executives need to start thinking about and need to start doing to prepare for the IPO?

Tom (05:48):

So you’ve really got to look at a number of aspects of a business. We always start at the top. So ensuring that you have the right board with the right chairman and that you’re ready to have a very successful board functioning well is definitely a good place to start. And obviously the management team is the most important. So making sure you’ve got the right CEO with the right executive team. So there are two key areas that we spend a lot of time on to make sure that when you think about the business from that particular point in time and you want to grow at multiples over many years from there, that you’ve got the right team to help scale the business from that particular point. And often, particularly with both board and management team, the people that were successful in the first part of the journey aren’t necessarily the people that are successful for the journey as a public company and making sure you’ve got that team. There’s also a lot of effort around systems process and IT where you want to make sure that the business is humming from a back office perspective before you embark on the IPO process.

Bryce (06:55):

Tom, I want to pick up on what you mentioned there about the board and the executive team. To me that’s somewhat surprising. You think about you’ve built a company to two 300 million revenue and then you’re going to come in and say, actually you board and exec are not great. Is that often the case when this sort of thing happens for an IPO and what are you exactly looking for in the CEO or the board or the exec team to sort of comfort you that going forward they’re the right people?

So each business is obviously different. I would say most businesses probably don’t actually have a board at that particular point in time as a private business. What we’ve found, the most successful businesses we’ve been associated with do have a board and that they’ve actually already thought about that prior to us investing, but ensuring that that is the right board for the next stage is certainly a very important part of the process. In terms of the management team, once again, it depends on the specifics. I’m not saying you don’t have the management team. I would say it is a reasonably common occurrence that there will be new members to the executive team in that period to ensure that you’ve got the right complete team to scale to many times your size. So obviously the ideal is you have an awesome board, an awesome management team, but that’s I would say a very rare instance

Ren (Alec) (08:20):

If we can dig into that a little bit more, I’m interested to know what the underlying cause or what the underlying reason for that is and what actually changes when a company goes public. Because I think for a lot of people thinking about IPOs, it’s just a point in time where the shares move from privately owned to publicly owned, but the operation of the business doesn’t really change. But that’s obviously not the case if these big changes need to happen and this whole process needs to go through. So what’s actually changing for the company itself?

Tom (08:49):

No, I’d actually say the way you described, it’s the way we think about it. So it’s actually not driven the IPO, it’s driven by what will help take the business to the next stage. So the fact is you’re right. You’re going from private to public. It’s purely a transition from a legal perspective. Our view on this IPO process is you are doing things that ensure that the business is successful as it happens. The private to public transition is common at that rough size. And so it’s not necessarily the going public part that is the driver. It’s about how do we take that business from two or 300 million revenue to a billion and these are the types of things that we think you need to achieve that. And as it happens, you are changing from a private to a public setting. There are some nuances around that.

Obviously as a public company you have a whole raft of things with shareholders. You need to be very good at communicating, very clear around communication with shareholders. So there are things like that that are nice to haves, but our experience with that is a great CEO great management team, they can pick that up ably quickly. So you don’t necessarily need that experience as a public company CEO or CFO to achieve that to be successful in the public setting. And I think Baby Bunting is a great example. Matt is awesome, Darren is awesome, and neither of those had public company experience as CEO and CFO. So they picked it up and ran with it and have done an amazing job as a public company.

Ren (Alec) (10:26):

One other element that TDM puts a lot of emphasis on, and I would be remiss if I didn’t give Ed Cowan a shout out who we had on the podcast earlier and spoke a lot about people and culture and the importance of that and the importance of that for TDM when they invest in a company. How do you think about people and culture when it comes to transitioning and going through an IPO? Is that, I mean it’s a tough thing to define at the best of times. How does TDM as an outside investor sort of assess where that’s at and then decide if that needs to be a focus of change?

Tom (10:58):

I would say once again, we think this is good process for any company of that size and scale, whether private or public, but in order to be successful in the public setting, you want to make sure that you’re humming and that the business is humming and for the business to be humming, you need the right people and culture at that particular point in time. So there are a number of ways to measure that. We are obviously big fans of engagement surveys and using tools like CultureAmp to ensure that from that you have very high engagement, you’ve got the right people, you know that the business from a people perspective and a people and culture perspective is humming. And obviously that’s something that we think is very important to ensure that as you go into that public setting, you’ve got that right because you don’t want to be doing mass of management teams for example, or even a significant portion of your team in the public centre.

You want to do that behind closed doors. You want to make sure you’ve got those people, as we say, we like to say 90% of the people on the bus are the right people and you want to do that going into that process. I mean another important part of that which we haven’t touched on is you want to make sure you’ve got the right incentives. So we are big fans of having the right long-term incentive programmes for your people. And so we spent a lot of time on that making sure you’ve got the right structures around long-term incentives, aligning both management team and the rest of the team with the shareholders leading into an IPO process.

Bryce (12:31):

Tom, one of the other aspects that you often hear about private companies not wanting to go public is all of the governance and financial reporting that comes with it and all the hoo-ha of talking to shareholders and whatnot. How do you help prepare companies for that part of the process, particularly that sort of financial reporting lens?

Tom (12:50):

Yeah, we hear that quite a bit and I suppose we run our private company boards and want our private company boards to operate exactly the way they do in the public setting. So we actually say for all our private companies, we want a public company quality board behaving like a public company in the private setting for those two years prior so that they’re practising becoming a public company. We actually see it’s the right thing for the business to get the best possible outcome. So we struggle with that concept. We actually think it’s important to have governance around successful businesses and it’s something that we’re actually quite passionate about. We also think that having 5, 6, 7 A grade non-executive directors is highly additive to the business. You actually get better outcomes by having that quality board in place. And so we don’t see it as a negative process-driven issue.

We actually see it as we’ve got 5, 6, 7 highly intelligent commercial people adding value that are passionate about the business are aligned ideally with equity as well and just trying to help that business grow the fastest it can. In terms of the financial reporting, once again, we actually want our private companies to behave in a very similar fashion as they would in public. And so that’s just good rigour that we like to bring to our companies and we don’t see that as a negative at all. In fact. So very simple things. We want our companies audited and completing their annual account six weeks post year end. We think it’s the right thing to do to get that. Then you’re humming the systems and processes are right. You’ve got the right ERP system, you’ve got the right people in finance when you can deliver on that. And yes, you’ve also got to do that in the public setting as well, but we want that regardless and we just see it as we want all our businesses behaving that way.

Bryce (14:49):

So if you take a step back and look at investing thesis of TDM and you spoke about that long-term approach, is that why it is important for you to make sure this process is sort of a 24 month and not just a let’s get this done in three months and let rock and roll in the markets?

Tom (15:08):

I think that is a very critical point. So we are not looking to an IPO to exit to maximise price and sail off into the sunset. We just see it as the next stage in evolution of the business. And in fact, one of the main reasons we look to an IPO is that so all the employees in the executive team actually get value for their equity and can be part owners in the business. That’s really a key driver of a business going to IPO for us. And so we still want to remain a long-term shareholder in that business. And in fact, if you look at Pacific Smile and Tarro, we own more businesses. We own a high percentage of that business today than we did prior to IPO. So it’s not about us selling and moving on, it’s about the next stage and evolution of the business for us and ideally we remain a shareholder for very long time into the future. It’s not an exit event for

Bryce (16:04):

Us. So you’re not private equity.

Tom (16:10):

I think look, everyone has their own way and own constraints. Obviously private equity have a constraint around fund life. We actually wanted to make sure when we set up a business we didn’t have that constraint and that’s really the key driver of private equity is that they have a fun life where they have to return money to their shareholders and that drives a certain behaviour. Actually when we first set up 15 years ago, went out of our way to ensure that we didn’t have that. So we didn’t have that constraint and that allows us to own businesses for long-term. And so in fact, one of our businesses we’ve owned for 15 years and I think at last count 40% of our portfolio we’ve owned for between seven and 15 years. And I think it’s a key foundation in terms of what, when we set up tdm, what we wanted to do, we want to be a business owner and we want to be a business owner and back those teams for a very long period of time to compound our capital at high rates. And I think that’s a very important differentiation to what we do and to ensure that the businesses get the best possible outcome. I

Ren (Alec) (17:18):

Love that philosophy. We hear it so many times from so many different investors thinking like a business owner, thinking long-term and it feels like it’s very easy to get caught up in the short-term movements in the market and all of that. And I guess the success of your fund is testament to the logic and the reason why you stick to those philosophies.

Tom (17:37):

I mean it’s common sense in our view. Sadly. I don’t think that many people actually stick with that and that emotional stability is very important and that change of mindset, I’m a business owner, businesses actually don’t change in value every day. It’s just that you happen to have a screen in front of you that flicks red or green on a given day, but that’s actually not is what is happening in reality. And I think that’s all. If you were to walk into the TDM office, no one has a screen open. It’s a very different nice office must admit great views. So there are no flashing lights. In fact, we will have a client ring up and they might ask What’s happening on the market today? We’ve got absolutely no idea. It’s a very different mindset and very hard to do when you have monthly reporting requirements. Fortunately, we don’t have that issue.

Ren (Alec) (18:36):

So if we tie together a lot of the minus 24 to minus six month period, I guess you could sum it up by sort of getting a house in order, like getting the right team in place, getting the right culture in place, getting the financial reporting in place, getting the right systems in place, getting everything ready for your next stage of growth. We’ve mentioned some of the companies that you took through that period and onto a successful IPO baby bunting, Pacific Smiles tarot without giving away anything that’s proprietary or anything that you can’t talk about, were there any big events or key learnings or anything that you thought was a big milestone for those companies in that period on their journey?

Tom (19:16):

We talk about the 24 month period, sometimes it’s longer. We’ve got to be a little bit careful. It’s not that cookie cutter and maybe I pick on baby bunting, you’re a big fan, so it’s an easy one. That was a longer journey than two years. We became the largest shareholder. We’re going to forget the date somewhere. I think in 2011 12, the business didn’t IPO to 2015 and there was a lot of work that happened between, let’s call it 2011 to 2015. We found Matt and found an awesome CEO that has done an amazing job that was very important, that business was a family business that didn’t have that CEO to go to the next level. So Matt became very important in terms of recruiting him. We recruited the entire board. We recruited Darren, the cfo, so we made sure we had that right team.

The business in 2009 10 didn’t have an online presence at all. So we spent a lot of time helping the business refine its online strategy and really going deep there. We spent a lot of time with the team providing international insights around what’s happening with Amazon around the world and some of the leaders that we look to like bye-bye baby in the US and what they were doing. And then we wanted to make sure if you talk about how it works in practise, we wanted to make sure baby Bunny had real-time sales, real-time, gross margin numbers, weekly wages. So the store managers and the people at head office were talking profitability on a weekly basis. They had that real time information and it’s amazing what that does to performance. And so the business had all the ingredients for success. It had an awesome store format and was doing many things that people weren’t doing in terms of its competitors, but it needed to really go to that next stage. And it was that three or four year period where by the time I got to IPO, it was a high performing team delivering on its results and had all the right systems to take it to the next level. So it’s not always a two year process, but there’s no big event either.

It’s a daily grind, I’d call them business.

Bryce (21:32):

Do you find that the founders are itching to get going and you are having to hold back

Tom (21:37):

A little bit? Not really. Look, founders understand or CEOs understand, they understand what it takes to build a business. They understand business is a daily grind. And so I think every great CEO or founder understands and knows when they’re ready. I think I would say where you see rushed IPOs, it’s normally driven by the shareholders and that’s where the problem arises. So you’ll see there’s been some more recent IPOs where maybe the CEO’s only been in for a month or two, that’s got nothing to do with what the CEO wants. That’s got to do with the shareholders wanting an outcome. And there’s some of the red flags that we look out for when we’re looking to invest in the public setting.

Ren (Alec) (22:24):

So if we move to the next period in the IPO process and this I imagine is where things move a lot quicker and there’s a lot more external forces coming and speaking to the company and really getting ready to go public, that minus six month to go live process, there’s a bunch of things, roadshows, prospectus, all of that stuff. So I guess if we start general and get specific, can you tell us how you approach that period of pre IPO with a company?

Tom (22:54):

So it’s sort of the investment bankers heaven at that point, so that’s

Ren (Alec) (22:59):

Not your heaven, Tom

Tom (23:02):

And the lawyers, let’s not forget them. So it really becomes process driven at that point. So it’s unfortunately for our management team, they’re working, we always say you’re working two jobs. You’ve got the IPO process by day and you’re running the business by night. So there’s a lot of work from a due diligence perspective that lawyers and friends at asset require that needs to get done. And it’s really that process is driven by the investment banks and the lawyers and it’s really a process. There are obviously various points of sensitivities that we have. We want to make sure our companies are presenting well. We want to make sure the management team answer the questions in the appropriate way. We’re obviously very sensitive to pricing. We want our businesses priced for success because we’re going to remain shareholders for a very long period of time. So we want to make sure the banks are aligned with that. When we deliver an IPO, it’s going to be successful. Just

Ren (Alec) (24:04):

On that, what does priced for success mean to you?

Tom (24:07):

It means that we’re not pricing for an exit. So if you are looking to sell either a significant portion of the majority of your shares, you’re looking to maximise price and so you’ll push those incoming investors as far as possible to maximise your outcome. We’re not trying to do that. You’ll see most often or certainly so far, we will ideally sell no shares. Sometimes we’ll sell a small amount of shares to facilitate liquidity. And the key for us is we want the institutions coming in to have a successful day, so to speak, in terms of that IPO day that they’ve bought shares and things have gone well and it’s gone up and that will pay off in the future when you have happy shareholders, that ensures that it takes a lot of pressure off the company, a lot of pressure off management because you don’t want those shareholders day one to be underwater. No one likes losing money and that creates a lot of pressure when people start losing money.

Bryce (25:04):

What about on the other side though? If you see over in the US markets, particularly the big tech stocks that come on an IPO and they pop 40% and then they come down, is that to you a successful IPO if your stock pops 40% or is that a mispricing? Yeah,

Tom (25:19):

There’s a fine line. It’s a very hard thing to do and I think there’s been a lot made of that obviously. But it’s interesting, particularly if you look at the US technology stocks, they’re often a hundred million dollars raises. For example, in a 2, 3, 4, 5 billion business. It’s a small proportion of free float that’s actually trading. And so you get a lot of demand for these high quality businesses and there’s a small available pot and that can drive some very significant day one outcomes. We sort of think about if you’re to paint the, it’s impossible to control. If you were to paint the perfect picture, we are looking for somewhere between 10, 15, 20 5% day one performance that makes everyone happy. Everyone’s quite excited by that, but unfortunately you can’t say that’s exactly what’s going to happen because it just doesn’t play out that way. But I think if you’re getting a 50 to a hundred percent pop, you have mispriced it. But I would say if you’re only selling a small proportion, it’s not the end of the world. If that happens, I’d much prefer that than to be down 10 or 20 and have all the pressure that puts on the management team. So I would lean towards more positive than running the risk of having a negative experience.

Bryce (26:37):

Really basic question for everyone out there who actually prices it.

Tom (26:42):

Good question.

Bryce (26:43):

Thank you.

Tom (26:46):

So I mean it’s a combination of the company and the investment banks, and that’s obviously in terms of when I say the investment banks, that’s obviously driven by the demand coming in from the institutions and so’s a balancing act. Obviously the company’s taking advice from the investment banks. We typically have a very strong view about price for many months leading. In fact, I think for baby moning, if I pick on that one again, we told the investment banks six months prior to IPO, this is where we think it would be a fair price. It ended up being there was significant demand for the IPO. It was well loved at the time of IPO. There was massive demand and we made the decision whilst we could have potentially increased price, so that wasn’t the right thing to do and we went ahead at actually the price that we suggested many months prior because we thought that was the right thing to do.

Bryce (27:41):

So does that create tension somewhat between company and bank during that process?

Tom (27:48):

Well, it can. So once again, depending on your shareholders, depending on your board, and depending on what you’re trying to achieve, there can be tension there. I would say it’s rare for us to have tension because we care about the next five to 10 years, not the first day. So we are going to price it and go in on the base of we want it to be successful. So that takes attention out. If you are pushing for a price maximisation event, you’ll have a lot of tension.

Ren (Alec) (28:13):

Is that because the investment banks want it lower so they can sell the shareholders?

Tom (28:17):

What makes it easier? They also want their clients, which happens to be both the company and the incoming shareholders, they want them to have success as well. So I mean the investment banks are in a tricky situation from that perspective and that’s just a fine line. But once again, I would say with our IPOs has been close to no tension around price because we’ve wanted successful IPOs. So it tends to be a happy experience for everyone.

Ren (Alec) (28:45):

So there’s a number of other events that happen in that six month period. The investor roadshow is obviously often spoken about, but for retail investors, unfortunately, at least to this point, we don’t have access to see the companies present. That’s mainly an institutional focus thing. The prospectus is something that anyone can read. And for retail investors often, it’s probably the best insight we get into how the company thinks about itself and its future plans. I imagine there’s a lot of work that goes into forecasting the future and agreeing on a forecast for the future that everyone can get on board with. What’s the process like that trying to predict the future, put it on paper and then send it out to the world?

Bryce (29:29):

Just make it look as rosy as possible. Right. Well

Tom (29:33):

Every word is verified, so let’s just say it’s painful. The actual process is very, very painful and every word is underlined and verified. That’s sort of something that is not that enjoyable. But in terms of, I mean you’re right, it’s very, unfortunately in Australia it’s very hard for retail investors to see them present. I would however recommend in the US retail roadshow, awesome, you can actually, there are half an hour presentations of management teams on retail roadshow for us IPOs,

Ren (Alec) (30:05):

Is that a website?

Tom (30:06):

That is a website free of charge. So for those that are willing to invest internationally, I would highly recommend love to bring that to Australia because we’re a big fan of equality and transparency and think it’s actually the right thing to do. So not here yet, but hopefully one day, yeah,

Ren (Alec) (30:25):

I would love that’s love to be part of the process. Equity mates add on, we can explore.

Tom (30:29):

There we go

And in terms of the prospectus, it is actually important. It’s not just Rosie, you really want a prospectus to give a very clear understanding to everyone what is that competitive advantage of the business and what are the future prospects? And ideally what we actually do as a little test, we actually give someone on the team the prospectus, this is prior to lodgement and say go build a model. And based on that, how does your model that you build just on the prospectus, you know nothing but that information in the prospectus has that compare to our internal five-year forecast and ideally they’re roughly the same. If we’ve achieved that, we’ve nailed the prospectus.

Ren (Alec) (31:23):

Okay. So is the approach very much to try and replicate what your internal forecast rather than going for an underpromise and overdeliver sort of model? Well

Tom (31:32):

Look, I think everyone wants to beat their perspectives. I’m talking in a range, but you want it to be broadly in a range and you wouldn’t want it to be over, so you don’t want it to be over. But if it’s directionally in line with your five-year model, that’s a great outcome. It means a retail investor that does the work or an institution that does the work gets roughly to the same answer.

Bryce (31:58):

So Tom, before we move to some actionable insights to close out this episode, once you’ve taken the company through this journey, they’ve hit the markets, their public company, where does your involvement then go from there?

Tom (32:12):

So it does depend on the company. So we’re still on the board of Tara, we’re still on the board of Pacific Smiles. Pacific Smiles actually listen, in 2014, so there are two examples, baby bunting. We decided to exit our position a couple of years after IPO. It was obviously a super successful investment for us. We love the business, we love the management team, but we felt the time was right at that particular point in time. So at the moment we have no involvement with baby bonding. So it really does depend on the situation. For those where we remain an investor and a board member, we remain active trying to help that business achieve the best it can achieve as we did in the private setting. So really there’s no difference where we remain involved. There can be a situation where, for example, we don’t have one at the moment where we are not on the board, we remain an investor even though we were on the board prior to going IP and we remain a long-term supportive shareholder. That is an important role for us to play.

Ren (Alec) (33:14):

Tom, as price alluded to, we want to get to some actionable insights, some things that our listeners and Bryce and I can take away and really apply to how we think about IPOs. And I guess you’ve stepped through a perfect IPO process, the textbook process that TDM thinks companies should go through to be ready for an IPO. How can someone like Bryce or I who can’t see what you’re doing at TDM or we can’t speak to company founders and company executives themselves, how can we from the outside looking in, look at a company and assess whether they’ve taken the steps and they are ready or they’re rushing the process?

Tom (33:53):

It’s a great question. It’s a little bit tricky. It’s a big question. It’s a little bit tricky. We obviously have some experience in that in terms of we are happy to invest in businesses at IPO or soon after IPO. And so we are looking for the same things that you would be looking for as you read a perspective. So what are the red flags, so to speak, that we would be looking for if we were coming into an IPO? That may not necessarily be an issue, but it’s just something to watch out for. So if you think about the people, let’s think about that. When did the board, if you go down through the board, when did they join the board? Did they join one, two or three months ago or did they join two, five or 10 years ago? And so they’ve been part of that process.

What equity do they own of the business? Are they there because they passionately believe in the business? If they passionately believe often they will have significant equity in the business. So from a board perspective, that tells you was it run as a proper functioning board for many years prior to rpo? Same with management team. When did they join and how much equity do they own? Did they join or two, did the CEO e join one or two months ago? Red flag doesn’t mean it’ll be a bad business, but it’s just obviously you go, well that seems a little bit strange. If you then go through the systems to make, has the business got a humming back office or do they talk about the systems and the prospectus? And when you look at those systems, are they best of breed systems? Are they using best of breed technology?

Do they talk about their people and culture in the perspectives? Some will give engagement scores for their people, so how developed are they and are they willing to talk about it? If they’re willing to talk about that, I would say that’s a good sign. If they’re not, it doesn’t, once again, it doesn’t mean it’s a bad company, but it’s just something to watch out for in the future. I would say something else, just from a people and culture perspective, always have a look at Glassdoor, not so big here in Australia, but if you’re investing overseas, Glassdoor will give you a great run through of where they are from people in culture. You’ve got to be a little bit careful, can’t believe everything you read, but that is a way that we, or a tool we use as an external investor as to assess where people are at from a people in culture perspective. So there are some tips and hints so to speak.

Bryce (36:14):

Nice. Are there any other sort of major red flags outside of your process that a retail investor could identify and maybe think twice about participating in an IPO?

Tom (36:26):

Well, I’d say, I mean we typically don’t invest in these businesses. Businesses that are coming together for an IPO. So where you’ve got 1, 2, 3 businesses merging at an IPO to then become a public company. The alarm bells ringing pretty hard at that point for us. But that’s certainly something that I think people should be looking out for. I mean we’re big fans of organic growth rather than acquisition growth. So how acquisitive has that business been? Obviously in a perspective, say pro forma, all that out so you can sort of get the pretty shiny picture. You’ve got to be a little bit careful and so we would be very wary of that and certainly something I’ll be recommending any retail investor to look out for as part of their process. But just because you might miss out on day one and we still think it’s a great opportunity to find great businesses, just make sure you do the work prior to investing.

Bryce (37:24):

What about the, who is actually selling the IPO side? Is that something that needs to be considered? Yeah,

Tom (37:30):

No it is. Sorry, I missed that one. I’d probably put that at number one actually. So price maximisation. So it comes to how big a proportion, I can’t believe I missed that one. How big a proportion are those major shareholders selling if they’re treating it as a price maximisation event? Back in the day many years ago, there were people that would sell a hundred percent of their shares at RPA hundred and they’d get away with it. That’s a rare occurrence. So you won’t see that very often. Institutions won’t put up with that anymore, but certainly significant portions be wary. It doesn’t mean it’s going to be a bad RPO, they may have other reasons to be doing that, other pressures, but just something to be careful of. Obviously ideally you have people either not selling or buying and even be better.

Ren (Alec) (38:25):

Do you think about the founder in the same way? Is there a sort of minimum amount of equity you would want the founder to hold or is it mainly the big shareholders that you’re looking at?

Tom (38:34):

It’s an interesting, we are actually happy for founders to sell some shares. Most people will actually screw up their face and think that’s a bit strange. We think it’s reasonable for founders. They’ve put 5, 10, 15, 20 years of hard work. They’ve put their house on the line, they’ve got the personal guarantee, they’ve earned the right to sell some shares. Now having said that, we want them to remain substantial shareholders and we want them to obviously have a substantial portion of their assets in the business to keep pushing that business to achieve everything it should be achieving. But we have no problem with founders selling some shares. They deserve it at the end of the day. And I would say that’s our view. I would say that’s actually not a widely held view. Most institutions hate when founders sell shares. We think that’s wrong, as long as they remain significant shareholders and a significant portion of their wealth, we’re very happy.

Ren (Alec) (39:27):

I’ve got one more question about IPOs before we wrap, and it’s not really related to Australia, but a trend that you are seeing out of America is special purpose acquisition companies.

Tom (39:38):

I knew you were going to race

Ren (Alec) (39:39):

And I’m just interested to get your personal thoughts on it. I don’t really know how to think about it, but it feels like every man and his dog right now is setting up a SPAC and IPOing it and then acquiring a company. How do you think about that trend? Do you think it’ll come to Australia?

Tom (39:55):

I dunno, it is reasonably new. It’s obviously been very popular in the last six months. It seems like a SPAC a day at the moment. And direct listing is another trend. I know slightly not to what you asked, but I’d say direct listings is pretty interesting to us for those companies of size and scale that have significant number of shareholders already, it’s actually a very fair process to go through. So we can definitely see the validity of a direct listing. The SPACs, I would say we’re still working through exactly how that plays out. So I think you’ll see, and we’re seeing quite a few SPACs, but actually now where companies are effectively backdooring through them now in the us I think let’s wait and see what that looks like. I think the jury’s out for the moment. Let’s see enough, we’ll have to

Ren (Alec) (40:46):

Get back on and have a full conversation about it at some. I

Tom (40:48):

Can’t help.

Bryce (40:49):

So Tom, final question. How do retail investors actually get involved in IPOs? It’s one of those things that we always unfortunately seem to be like third hand sort of information. It’s not until it all happens, and maybe that’s just how things are at the moment, but yeah, what’s your view on that?

Tom (41:05):

Yeah, look, it’s challenging. And so at the moment, really the only way, and we’d love this to change, but at the moment, the only way is to be a retail client of the broker that is doing the IP. And so at that point in time you can participate, but yes, there’s a five, 10, 15%, maybe a 20% day one performance that isn’t the game. So yes, that’s nice, that makes everyone feel great. The game is over the next five to 10 years and say, are you picking the right management team with the right business driving and getting the right outcomes on a five to 10 year view, that day one outcome is sort of irrelevant. So you can buy day one. And there are many examples. Back in the day we bought shares in JB HiFi day one, super successful investment. Yes, it went up, I can’t remember the exact number, 25, 30% day one, but look at what it did in the 10 years post. So it was the same with baby bunting. There are many, many, many examples. I can see why people are disappointed with that. I would just say hopefully that changes one day, but don’t not invest if you find the right business and management team because you’ve missed out on that first 20%.

Bryce (42:20):

Nice. Well Tom, thank you so much for joining us. It’s been an absolute pleasure walking through the IPO process to everyone in the equity mates community. Stay tuned because we’ve got an exciting episode to follow this where we’re going to be walking through a bit of a real life example with a CEO of one of Australia’s most well-known companies who is considering an IPO. And so stay tuned for that and we’ll be walking through that with Tom. Now, if you have really enjoyed listening to what Tom has had to say today as well, there is a whole bunch of further information available at the TDM website around the IPO process as well as a bunch of other awesome resources. Everything from case studies on a number of their investments, some blogs around people and culture and what they look for. And also the Scaling Up podcast, which is all lessons from the world’s best CEO and founders. Head to tdm growth partners.com to sign up to their quarterly email, perhaps the second best email in town behind equity rates. Thought starters, I say second best email and second best podcast. It’s honestly a phenomenal resource for sort every sort of investor head there and sign up and they’ll send you a quarterly email as well as all those awesome resources. But Tom, thank you for your time. We’re looking forward to the next episode. I appreciate it.

Tom (43:35):

Loved it. Thanks for having me.

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