Re­tail in­vestors miss out on large gains from IPO of­fers

We cal­cu­late that in­sti­tu­tional in­vestors have made nearly six times as much on flota­tions than the gen­eral pub­lic

Shares - - CONTENTS -

Re­tail in­vestors are miss­ing out on sig­nif­i­cant gains en­joyed by in­sti­tu­tional in­vestors who are able to take part in IPOs (ini­tial pub­lic of­fer­ings), ac­cord­ing to anal­y­sis by Shares and AJ Bell.

We’ve cal­cu­lated the share price per­for­mance of ev­ery IPO this year and com­pared the gains be­tween buying at the IPO offer price and buying at the first avail­able price in the mar­ket on day one.

The dif­fer­ence is as­ton­ish­ing. In­sti­tu­tional in­vestors, such as ac­tively-man­aged funds and pen­sion funds, would have made an av­er­age 11.8% gain if they’d bought all of the 77 com­pa­nies float­ing on the Lon­don Stock Ex­change this year. The data as­sumes they paid the IPO offer price.

In con­trast, re­tail in­vestors would have only made 2% av­er­age gain if they’d bought at the first pos­si­ble chance, be­ing the mar­ket open on the first day of deal­ings.


The ma­jor­ity of IPOs of­fers are not open to the gen­eral pub­lic. The peo­ple run­ning stock mar­ket flota­tions such as bro­kers and banks find it eas­ier to call round a small group of peo­ple who can po­ten­tially put up large amounts of cash to sup­port an IPO.

In­volv­ing thou­sands of re­tail in­vestors is much more of an ef­fort given lots of pa­per­work and pro­mo­tional work; hence why the gen­eral pub­lic tends to have to wait un­til a stock is trad­ing be­fore they can buy.

So why have re­tail in­vestors only be able to en­joy a frac­tion

of the re­turns gen­er­ated for in­sti­tu­tional in­vestors in this anal­y­sis? The an­swer is sim­ple. Many stocks have started trad­ing at a much higher price than their IPO offer.

Strong de­mand for stock pushes up the price ahead of the mar­ket open, so the first trades are set­tled at large pre­mi­ums to the price made by the in­sti­tu­tional in­vestors in the offer pe­riod.


One view among City ex­perts is that IPOs are gen­er­ally priced at a 10% to 20% dis­count to their the­o­ret­i­cal value. So a com­pany worth 100p per share would nor­mally float at 80p or 90p.

Pric­ing the shares in such a way makes them at­trac­tive to in­sti­tu­tional in­vestors and in the­ory sug­gests the shares are more likely to rise once they float, as the value ad­justs to more nor­mal lev­els.

We cal­cu­late that re­tail in­vestors on av­er­age have this year paid 9.8% pre­mium to buy IPOs com­pared to in­sti­tu­tional in­vestors buying at the IPO offer price.


This year’s big­gest dif­fer­ence be­tween the mar­ket open­ing price on the first day of deal­ings and the IPO offer price was

Sk­inBioTher­a­peu­tics (SBTX:AIM)

with a 47.2% pre­mium. The Manch­ester Uni­ver­sity spinout priced its IPO at 9p, started trad­ing at 13.25p and peaked at 16.25p in April.

Re­tail in­vestors had to pay a 34.5% pre­mium to in­sti­tu­tional in­vestors who took part in the IPO of ket­tle con­trols spe­cial­ist

Strix (KETL:AIM).

The lure of a 7% div­i­dend yield (based on the IPO price) and cheap val­u­a­tion made Strix seem a no-brainer for many in­vestors, hence why so many peo­ple were happy to pay up when the shares started trad­ing. How­ever, we’d say Strix was an ex­cep­tion to nor­mal IPOs.

The busi­ness was the last hold­ing in a pri­vate equity fund try­ing to wind it­self up, so the owner was ef­fec­tively happy to get rid of Strix at a dis­counted price, ac­cord­ing to Chris White, a fund man­ager at Pre­mier As­set Man­age­ment.

Alfa Fi­nan­cial Soft­ware (ALFA)

started trad­ing on the stock mar­ket 29.2% above its IPO price at 420p and now trades at 489.9p.

Re­tail in­vestors should al­ways think about what a com­pany is worth be­fore buying the shares.

Never race to buy IPOs sim­ply for fear of miss­ing out on the post-list­ing rally. In­evitably most new stock mar­ket list­ings go up, then back down slightly (as early birds take profit) be­fore head­ing back up. That gives you plenty of time to re­search a stock and de­cide at what price you’d be happy to buy, if at all. (DC)

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