Chapter 1: What is the main topic discussed in this episode?
Welcome to Shared Lunch, brought to you by Sharesies. I'm Garth Bray. Today, inspired by the journey that Elon Musk is taking us all on to the stars and wherever, we're taking a look at IPOs and what they mean, how a company decides to launch, who makes that happen, and what it means for investors. We'll have some of the best in-house experts at Sharesies helping us with that.
And of course, we'll talk about the SpaceX IPO as well. Before we get to that, some important information you should always consider before investing. Investing involves risk. You might lose the money you start with. We recommend talking to a licensed financial advisor. We also recommend reading product disclosure documents before deciding to invest.
Everything you're about to see and hear is current at the time of recording. Okay, this is a fantastic trans-Tasman crossover here between our offices in Wellington, where we have Susanna Batley joining us, and Jackie Newman also in Sydney at the Sharesies office. I'm going to start with you, Jackie. What is an IPO?
An IPO? An IPO is really the first time that a company offers its shares to the public. So what is happening is that ownership is transitioning. So prior to IPO, the company might be owned by founders, by employees, by VC, by private equity. The process of an IPO takes that company from that private ownership into the public hands, if you like. There are a number of ways that this can be done.
Firstly, you can use primary shares. So the company can issue new shares to raise capital and the proceeds of the raise go to the company. The company might use that to fund growth. It might use it for acquisitions. Another component of an IPO might be what's called a secondary sell down. So this is where you've got the owners, the private owners selling down all or part of their holding.
And that can be, you know, in its entirety or just part of their holding. So often IPOs are a combination of both. So you've got this primary and secondary or sell down component there. But sometimes it's one or the other. And it's an important thing to be aware of when you're considering any IPO.
Because I guess if you're a potential investor, it's good to look at who else is going to be in the company with you and also maybe who's leaving and why. Is that fair comment?
Often we think about those existing owners before the IPO as insiders. And really, they have much more information about the company themselves. then maybe new investors that are looking at it once it's listed. And so if those existing shareholders are selling down, maybe there's very good reason for that.
But it is definitely worth thinking about, given that they probably know more information about it. So why are they selling versus, say, raising new money for growth and going, actually, we've got so many good opportunities. We want to raise more money. We're happy to dilute ourselves in order to grow the pie and grow the value of the company.
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Chapter 2: What is an IPO and why is it significant for SpaceX?
How is it governed? And then there's other factors around risks, costs. growth, the financials.
Chapter 3: How does the IPO process transition ownership from private to public?
So it's really a deep dive, a very fulsome disclosure of a company that has previously been in private hands, providing that information to the market, to investors, to give them, I guess, comfort around investing in this opportunity because they know nothing about it.
You've taken a look at SpaceX's offer document. Generally, I mean, is this a pretty reliable tell-all? How much information can an investor gain just from looking through one of these IPOs for themselves?
Look, it is pretty comprehensive. If we take that SpaceX S1 filing, I think it's 308 pages. So there's a lot of information to digest and go through there. It goes through some pretty rigorous processes. There are due diligence committees involved. There's auditors involved, there's legal specialists involved in sort of signing off various parts of the prospectus. So it is pretty comprehensive.
Having said that, the value of a company is really the future cash flows discounted back at its most basic level. And we don't know the future. And if anything, it feels more unpredictable and volatile as it ever has been. And if you look at SpaceX in particular, there are some pretty big moonshots that it's taking. There's a lot of information around things like total addressable market.
I think it's been put at 28.5 trillion US dollars in the prospectus. That's about the size of the US total GDP, just to put it into perspective. Is that really realistic for SpaceX to be able to grab? And then what is the pathway to getting that? And is that plan believable?
So yes, there's a lot of information, but it's also working out what parts do you think are credible, given that a lot of it is really based on the future.
Is there information perhaps that retail investors aren't going to be getting ready access to in the next little while that others might be getting about this in the lead up?
Yeah, so the IPO prospectus is the source of truth and the document which contains theoretically all of the information that investors should need to be able to make a decision about whether or not to invest in the business. But what's happening in the background around an IPO is that
The company is meeting with institutional investors on the management roadshow, the non-deal roadshow, and also through analyst investor education processes. And so the institutional community is really going into a deep dive with management around the detail that's in the prospectus because they're going away and building their own financial models and making a decision about the IPO.
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Chapter 4: What insights can investors gain from SpaceX's offer document?
There's quite a process behind this. And the mechanism to price an IPO is a book build, which is basically like an auction. And so what happens there is that the investment banks and the issuer will work together to determine a price range.
And that will often be informed by feedback that they've got so far, looking at comparable companies, looking at, you know, what the market is doing at the moment. And then they will get investors to bid across that price range. So they will take bids at, you know, throughout the price range and look to see where the demand sits across each of those various price points.
How are they trying to work out what value to give it, what price to put on it?
Yeah, so you can think of it somewhat as a stage process often. So the first stage will be determining what is the appropriate price range to go out with. Then what happens is that when the book build is actually run, institutional investors will bid at various points throughout the price range. So they might say, I'll take $100 million at the low end of the price range and
At the high end of the price range, I'll take $50 million. And so the investment bank is building a book of demand at those various price points. At the end of the process, they'll have a book of demand, which is covered or not covered at various price points. And they will determine this is where we should price the deal.
Ideally, they will price the deal at a level where you've got at least one times coverage and a bit more so that there is that sort of demand in the aftermarket. Taking a step back though, institutional investors, how do they determine where they are going to bid, at what price they are going to bid? So they meet with...
and go away and do often a lot of work in the background around building their own models, determining what is a fair price for this company. And that really informs the price that they are willing to pay at any given level.
So, you know, it's quite a process that's involved and there's, you know, back and forth in terms of them building those models, getting a real understanding of the financials and the growth process. profile of the company and all of those factors sort of coming into play to determine the price.
It sounds like a lot but it's all coming to a head June 12 I believe we expect this listing on the NASDAQ SPCX the ticker Hugely, hugely anticipated by a huge number of people. So I guess a lot of those numbers, a lot of those valuations, a lot of those guesses will get tested out on that day. Jackie Newman, Susanna Batley, thank you so much for joining us.
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