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Avoiding momentum killers: lessons from GYG's $2.2bn IPO

One of the most compelling stories in the financial markets this week is GYG’s IPO.

Despite listing with 85% of its shares held by the top 20 investors, GYG’s IPO has already attracted a significant number of retail investors (GYG accounted for 30% of Thursday's total volume on Superhero). These investors are expected to drive the majority of GYG’s trading volume, particularly in the early months.

The challenge for GYG, and other forthcoming "hot" IPOs, is navigating the transition from a private market with historically high valuations to a public market that has, in recent times, often penalised company valuations.

With a potential IPO season on the horizon, there is a looming risk that “overvalued” private companies could face a harsh reality check upon listing. For instance, GYG is currently valued at 32.5x forecast FY25 EBITDA, whereas companies like Collins Food and Domino’s trade at 5.1x and 10.1x, respectively.

Where does my concern stem from?

At one of our recent community dinners, advice from an attendee was, “If you don’t IPO at $150m or greater, you’ll be caught in a raise spiral.” 

Whilst this conventional wisdom has some truth to it, I personally think it is also dated.

With the rise in retail investors and decline in long-term outlook of many institutions, it seems that a company’s market cap is no longer a secure safe haven against the volatility that being listed can bring. Instead, public companies of every size must now own the relationship and the story that they have with investors, or else risk losing momentum.

Public companies must translate the private investor narrative to the broader market.

As a private company, having a strong relationship with investors who grasp the narrative is crucial. A significant part of GYG’s high valuation is undoubtedly due to its management team’s efforts. It is no small feat to have institutions vying for a stock, and whatever the future holds, GYG’s team deserves credit for their work here.

However, for any IPO to achieve sustained success, the message must resonate with a new group of investors. While GYG has generated considerable hype, this has also set high expectations, and anything less than perfection could spell trouble.

To maintain momentum, a company needs to build the same level of trust and belief with its broader investor base as it has with its top 20 investors. For newly listed companies, this realisation can be jarring: an IPO is likely the most attention a company will receive from the market and is a great momentum starter. However, the IPO process can place a company’s narrative into the hands of third parties, making it difficult to reclaim control. For GYG, while the narrative is favourable now, history shows that media and third-party sentiment are subject to change

A recent example of what not to do can be found in Booktopia. This week it suspended trading and was valued at a measly $10m market cap, a far cry from the ~$350m valuation when it IPO’d in December 2020. 

Looking back at its early public days, media coverage provided significant tailwinds: it was hard not to be excited about Booktopia’s story, and investors flocked in. However, over time, media coverage dwindled in both frequency and positivity, and the hype faded. Throughout this period, as far as I can tell, Booktopia did little to cultivate direct relationships with shareholders, instead relying on intermediaries. Consequently, Booktopia’s fate was largely in the hands of the media, analysts, and forums.

Of course, shareholder communication is not the sole driver of share price, but it is a critical factor that many companies overlook.

Had Booktopia built a direct line of communication with its investors, the story might have unfolded differently. It could have nurtured a loyal base of investors and worked with them through challenges (and perhaps still can). But by letting third parties communicate on its behalf, Booktopia lost the ability to influence the hearts and minds of the market, and intermediaries had a field day.

So to take heed of this lesson, my question for the CEO at GYG (or any other listed leader) is this: who has the better relationship with shareholders - the AFR, or you?

Advice for listed companies, new and old.

The challenge for any listed company is clear: if you let intermediaries control the narrative, you lose control over the very factors that influence investors to buy, sell, or hold your stock.

The team and I are increasingly convinced that, no matter how long a company has been listed for, the key to future success is to own the relationship with its investors. You only need to look to Elon Musk as a recent example of someone who demonstrates this time and time again, especially since his acquisition of Twitter/X. Recently, with his share price down and issues with production and product quality, Elon still managed to secure an astronomical remuneration vote. How did he do it? A large part of it was by being proactive and engaging directly with the market, predominantly through X.

So, beyond acquiring one of the world’s largest social media platforms, what can you do to take control of your narrative? It comes down to building a direct line of communication with your shareholders.

If the market turns to you, rather than intermediaries, for information, you’ve already won half the battle.

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