Last 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:
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.
Because an IPO isn’t yet trading, it’s impossible to assess how the stock has behaved over the years before deciding to invest.
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.
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%.
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 3 to 6 months appears to be best for holding IPOs in the short term. However, in the long term, IPOs tend to perform poorly.
For the 258 UK IPOs studied, Stockopedia’s researchers found a negative median compound annual growth rate of -4.3% across five years. Small-cap IPOs that are typically under-researched and less anticipated by the market outperform mid and large-cap IPOs on nearly all metrics assessed. Throughout the last five years, the average performance of small caps sat at 85%, while large caps saw a negative performance of -20% one to two years after the IPO.
Interestingly, in a joint survey of 1,2000 private investors conducted by Stockopedia and Interactive Investor, 33% of respondents said they had or would invest at an IPO for long-term growth, while 23% said they would invest for medium-term growth. Just 16% of respondents said they would invest to make a short-term profit.
Although companies that float can vary widely, based on Stockopedia’s research, it appears that many private investors are putting their capital at risk through a lack of IPO knowledge and understanding.
While plenty of private investors have successfully bought into IPOs, it’s important for any private investor, new or old, to thoroughly research the risks involved and keep in mind that the odds are more heavily stacked against them as an individual.
“You’d want to be careful that you’re not just chasing a story or hype,” warns certified financial planner Douglas Boneparth in conversation with CNBC. “Don’t let excitement get in the way of making sure the investment you’re making is a smart one.”
This article does not constitute financial advice. The author and Universal Media Ltd. are not qualified financial advisers. All investments are made at the reader’s own risk.
Private investors are seeing this morning’s market falls as a buying opportunity. 80% of the trades placed through Hargreaves Lansdown’s share dealing service this morning were purchases. This compares to around 60% on an average day.
Senior Analyst at Hargreaves Lansdown, Laith Khalaf commented: ‘Private investors are clearly seeing today’s market fall as a buying opportunity, and are out in force bargain-hunting. The most popular stocks are also those which have seen their prices hit hardest this morning, namely the banks and house builders.
We know that private investors have been sitting on the sidelines until after the referendum, and early indications are there may be some buying activity now the market has dropped.’
The UK stock market fell sharply this morning, but has since staged a bit of a recovery, though it is still down around 4.5%. The FTSE 100 has been bailed out by a falling pound, but the FTSE 250 mid cap index has not been so lucky- it has fallen by over 8% by lunchtime, because it is more domestically focussed and has fewer overseas earnings. Just to give some context to the fall, the FTSE 100 is still currently trading at above 6,000, around 10% higher than the low of 5,537 it fell to in February of this year.
The FTSE 100 has fallen further in the past. On Black Monday, in 1987, it fell by 11%. On 10th October 2008, it fell by 9%. On 11th September 2001, it fell by 6%.Nonetheless, today’s fall so far makes it one of the worst days the Footsie has witnessed.
Laith Khalaf says: ‘The Footsie has been bailed out by the Sterling collapse, because all its international revenues streams are now worth that much more in pounds and pence.
Financials and house builders are bearing the brunt of the pain, with Lloyds bank being one of the biggest fallers. It’s probably safe to say the public sale of the bank is now firmly in the long grass, and the return to full private ownership of both Lloyds and RBS has been knocked off course.
It’s also been a bad day to be a mid-cap company - the FTSE 250 is suffering to a much greater extent than the blue chip index. Mid-cap companies have sold off harder because they are perceived to be more risky, and tend to be more domestically-focused with fewer overseas earnings.’The 10 most popular shares bought by private investors this morning, ordered by the number of trades placed are:
|Lloyds Banking Group
|Legal & General Group
|Royal Bank of Scotland Group
Below are the top ten funds purchased, ordered alphabetically. Tracker funds have proved very popular today as investors have simply sought blanket market exposure. However the tried and trusted names of the industry are proving popular too.
|BlackRock Gold & General
|CF Lindsell Train UK Equity
|CF Woodford Equity Income
|HSBC FTSE 250 Index
|Legal & General UK 100 Index Trust
|Legal & General UK Index
|Lindsell Train Global Equity
|Marlborough Multi Cap Income
|Marlborough UK Micro Cap
(Source: Hargreaves Lansdown)