THE AFTER-MARKET PERFORMANCE OF INITIAL

PUBLIC OFFERINGS: AN EMPIRICAL STUDY FOR

SOUTH AFRICA

Clayton M. Reed

1

AGENDA

Background of South Africa

Why South Africa?

Research Questions

Literature Review

Data & Methodology

Results & Findings

Concluding Remarks

Q&A

2

BACKGROUND OF SOUTH AFRICA

3

4

BACKGROUND OF SOUTH AFRICA

Former British colony

Apartheid

Whites

Coloureds

Blacks

African National

Congress

First universal

elections held in 1994

5

WHY SOUTH AFRICA?

6

WHY SOUTH AFRICA?

One of the top emerging

markets in the world

BRICS

South African Rand

Largest African economy

3.8% GDP growth for

2011*

Resource-rich country

Gold, chrome, platinum,

coal

*Citi Investment Research & Analysis

7

RESEARCH QUESTIONS

8

RESEARCH QUESTIONS

As a prospective investor, what type of equity

(unseasoned or seasoned) exposure will

yield the greatest return?

Is IPO performance in South Africa

consistent with previous international

studies?

Is IPO performance in South Africa different

during a post-Apartheid era?

9

LITERATURE REVIEW

10

LITERATURE REVIEW

Aggarwal and Rivoli (1990) – United States

Ritter (1991) – United States

Levis (1993) – United Kingdom

Aggarwal, Leal, and Hernandez (1993) –

Latin America

Page and Reyneke (1997) – South Africa

11

PAGE AND REYNEKE (1997)

118 South African IPOs between 1980-1991

48-month holding period

Size matched seasoned portfolio – IPO

underperformance of 13.1% per annum

Sector matched seasoned portfolio – IPO

underperformance of 18.4%

12

DATA & METHODOLOGY

13

DATA & METHODOLOGY

174 IPOs between 1995-2008

Short-term performance

First 21 days post-issue

Long-term performance

First 36 months post-issue

Benchmark index

Johannesburg All-Share Index

14

DATA & METHODOLOGY

Adjusted returns

Raw excess returns

Holding period returns

Cumulative excess returns

Wealth relative ratios

Relative excess returns

15

RESULTS & FINDINGS

16

RESULTS & FINDINGS

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Days Following IPO

Average Short-Term Holding Period Returns Following Initial Public Offering

HPR

HPR-Index

17

RESULTS & FINDINGS

-70.00%

-60.00%

-50.00%

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Months Following IPO

Average Long-Term Holding Period Returns Following Initial Public Offering

HPR

HPR-Index

18

CONCLUDING REMARKS

19

CONCLUDING REMARKS

Short-term outperformance

1.57% per week

Long-term underperformance

27.98% per annum

Results are consistent with previous

international literature

Recommendation: do not hold South African

IPOs for long-term exposure

20

Q&A

21

APPENDIX

22

APPENDIX: EQUATIONS

ARit = Rit — Rbmt

ARt =

HPR =

HPRT =

WPRT = / 23

APPENDIX: DATA TABLES

Period Relative to the

IPO Listing

No. of

Companies

IPO Portfolio

HPR

Index

Portfolio

HPR

Wealth

Relative

First week 174 3.80%* -0.35%* 1.042

Second week 174 -0.23%* -0.24%* 1.000

Third week 174 0.67%* 0.72%* 1.001

First two weeks 174 -1.17%* -0.49%* 1.007

Weeks two and three 174 0.56%* 0.30%* 0.998

First three weeks 174 4.66%* -0.06%* 1.047

Short-Term Performance

Notes: *Significant at the 5% level.

Average holding period returns are calculated as /n; where, Rit, is the return on share i for day t following the listing date and Ti is

the number of days from the listing date. For IPO companies that are delisted before the required holding period ends, the holding period return is calculated

until listing date. The benchmark index returns are also calculated over the same truncated period.

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APPENDIX: DATA TABLES

Period Relative to the

IPO Listing

No. of

Companies

IPO Portfolio

HPR

Index

Portfolio

HPR

Wealth

Relative

First year 174 -20.59%* 7.32%* 0.740

Second year 168 -25.99%* 9.71%* 0.733

Third year 159 -10.51%* 7.00%* 0.922

First two years 168 -47.13%* 17.01%* 0.468

Years two & three 174 -36.86%* 18.57%* 0.645

First three years 174 -58.00%* 25.87%* 0.380

Long-Term Performance

Notes: *Significant at the 5% level.

Average holding period returns are calculated as /n; where, Rit, is the return on share i for month t following the listing date and Ti is

the number of months from the listing date. For IPO companies that are delisted before the required holding period ends, the holding period return is calculated

until listing date. The benchmark index returns are also calculated over the same truncated period.

25