Finance Monthly - October 2021

ast year, there was a record breaking number of technology companies launching on the public market. According to GlobalData, tech IPOs were up by 26% globally, reaching 771 as the COVID-19 pandemic triggered a major digital shift. Additionally, in the United Kingdom, there were even more flotations in the first half of 2021 than there were throughout 2020 as several leading tech startups, as well as other big-name brands, opted to list in the English capital with sky-high valuations. Amongst those making their debut were Darktrace, Dr Martens, Deliveroo, and Moonpig. IPOs can be highly alluring to investors. Companies that go public are frequently in industries of significant interest to investors at the time and IPO companies tend to sell products that have rapidly become household names, with IPOs serving as a means of raising cash to sustain this rapid growth. However, despite their allure, IPOs are generally considered riskier investments. This is because they: • Are generally young companies Smaller companies experiencing rapid growth are typically the ones that decide to go public. Unfortunately for investors, these companies usually have limited operating histories, less experienced management teams, and a limited product range. • Lack a stock-trading history Because an IPO isn’t yet trading, it’s impossible to assess how the stock has behaved over the years before deciding to invest. • They sell their shares first to large institutional investors IPOs are generally first sold to large investors at the offering price while other investors are free to bid on those shares above or below the offering price once the stock begins trading. In fact, recent analysis by online research platform Stockopedia suggests that the odds are rather heavily stacked against private investors when it comes to investing in new company IPOs. Structural bias puts private investors at a disadvantage Stockopedia analysed thousands of data points for 258 IPOs listed in the UK between January 2016 and May 2021. The research platform’s new IPO Survival Guide shows structural bias in the current system that leaves private investors with the odds stacked against them. This is partly because, as mentioned, large pre-IPO purchases are marketed with institutional clients before a company is floated on the London Stock Exchange and this makes it close to impossible for private investors to purchase shares at the issue price. According to Stockopedia, 89% of IPOs open higher and, on top of this, the average price “pop” from the issue price to the first day opening price is nearly 10%. Private investors can lack knowledge and understanding Stockopedia’s analysis draws attention to the uneven performance distribution of IPOs and where private investors can potentially gain, and lose, the most. On average, a timeframe of Finance Monthly. Inve s tmen t 53