Addressing an adviser lunch in Sydney on Tuesday, the fund manager’s head of Australian equities growth, Dushko Bajic, said the small number of local technology companies that made it through to IPO stage meant that the stocks had to a large extent already proven their worth by the time they were listed.
“In the last two decades, 4,500 companies in the IT industry took series A venture capital investment, but only 75 took four rounds of investment and made it all the way to IPO,” Mr Bajic said.
“Almost half the companies that did make it to IPO ended up being dominant category winners, so the IPO process is essentially a thinning out contest.”
Mr Bajic said the Australian tech sector, which made up only 12 per cent of the top 300 stocks in the market, was often criticised for its overinflated prices as local fund managers piled into the few stocks available to gain tech exposure for their investors, such as logistics software company Wisetech.
“But if you test that with some facts, looking at the shares [in Wisetech] that are not owned by the founders and the board, more than a third of those are owned by offshore investors,” he said.
“So that comment doesn’t bear up to scrutiny — it is not just Australian investors who rate this company, it is a large cohort of offshore investors as well.”
Mr Bajic said another common criticism of tech companies was that their enduringly high price to earnings ratios meant investors could not possibly get sufficient growth to justify what they were paying.
“If you look at when Salesforce listed in the US, over the first five years their average P/E ratio was 161 times, and despite that the company went from a price of $4 to $17, so more than a fourfold increase despite carrying a P/E north of 100 times,” he said.
“From 2004 to now, the price has gone up 37-fold from $4 to $148, market cap has gone from $US1 billion to $135 billion, and this is all despite being on an average P/E of 98 times during that entire 15-year period.”
Mr Bajic added that while tech companies could be “over-bought and over-sold through periods”, investors ignored them at their peril given they were often generating growth regardless of economic conditions.
