An IPO Special: Get a piece of the emerging companies

Over on the Grey Nomad there has been a lot of talk about ETFs and getting broad market exposure with limited capital. But over here we have talked about those emerging companies and bargain priced blue chip stocks. Now I want to introduce the best of both worlds. This is for those that want a diversified portfolio but like to get a little hot under the collar chasing bulk capitals gains.

This stock is currently scheduled to list on the ASX early December, but those looking to buy in ahead of the live listing, applications to partake in the IPO need to make any such submissions by November 16th. Now the Stock that I am talking about is of course 8IP Emerging Companies Limited (ASX:8EC).

Broadly speaking these guys are going to take a whole heap of money (somewhere between $18m and $50m) and invest in companies which fit into the emerging company’s bracket. The typical profile of the companies will be small cap ranging from $20m to $500m, and the group want to hold around 30 stocks at any one time.

The below table, taken from the 8EC IPO Prospectus shows the three categories that will be used to source the stocks.

“Star” Companies with a multi-year competitive advantage
“Turnaround” Companies in situations where specific change has occurred
“Under-researched” Companies with attractive growth potential.

How this works is that the ‘Manager’ will have authority to take the cash on hand and identify companies which fit in with the above strategy. Pretty much my dream job. But in this case the ‘Manager’ is Eight Investment Partners Pty. Names are remarkably similar, as the chief investment officer (my dream job) is filled by executive director Kerry Series. The ‘Manager’ will be paid a management fee of 1.25%, while other costs may be incurred to the company as well.

While they haven’t listed on the market yet, the ‘Manager’ has been doing this since 2011, and is spruiking a positive track record. They report annualised returns net of fees compared with the S&P / ASX Small Ordinaries Accumulation Index. Simply the net difference between their performance and the performance of the small cap stocks on the ASX, less any fees. And that number is 11.31%.

While higher than many of the celebrated returns of the ETFs spoken about at the Grey Nomad the risk profile is irrefutably higher. And of course past performance is not an indication of future performance. While many ETFs track a particular index, these guys want to beat the index, and put their ‘expertise’ on the line to make it happen. Basically, if you invest here you are trusting old mate Kerry Series (solid name am I right?) to make the right call.

That is the main risk here. The investment strategy. It is important to balance that with the sort of risk you undertake when you choose your own small cap investments. Can you out research Kerry? You very well may be able to. Hell you read Blue Lake Invest. But remember we can only assume Kerry also reads Blue Lake Invest, plus does a bit more.

Regarding whether to go in now for the IPO or wait for the listing. Well this guy is going to wait for the listing, where I anticipate a discounted price will be on offer.