The IPO market is humming again as the markets recover from the shock of Covid-19 with Deliveroo the latest big name set to join the London market. In the US, shares in virtual gaming platform Roblox jumped more than 60% on its recent market debut (10 Mar), and other stocks have been soaring this year as the public get their first chance to buy stock.

Retail investors have lost out, however. They’ve generally had to wait until the stock starts trading on the market before buying, whereas institutional investors have been given an unfair advantage in being able to buy at the IPO price.

Shares has analysed all the London-listed IPOs – standing for initial public offering but often more accurately described as private placings – from the start of 2018 to date and found that the average price went up by 12% on the first day of dealings before most retail investors had a chance to buy. Several stocks have ‘popped’ by an even greater amount.

Importantly, very few of these high flyers included the ability for retail investors to buy at the IPO offer price.

Why does this first day ‘pop’ happen? A theory exists that IPOs are priced at a 10% to 20% discount to their estimated value to incentivise investors to back the company before it has a proven track record as a listed business. A hypothetical company worth
100p per share would therefore price its IPO at 80p or 90p per share.

Retail investors deserve better access to IPOs. Several major investment platforms including AJ Bell and Interactive Investor have launched a campaign and a recent review of listing rules also hints at changes to make IPOs more genuinely ‘public’ offerings.

These platforms want their arguments to also be heard by the Government and the boards and advisers of companies considering listing on the London Stock Exchange.

‘Part of this debate should be around whether there needs to be a regulatory obligation on companies coming to market to consider a retail element to their IPO,’ they noted in a joint letter.

A shift in regulation looks imminent following the Lord Hill review into the UK’s listings regime. As well as making it easier for the world’s most innovative and successful firms to list and grow in the UK, this planned revamp also included a nod to making IPOs more retail friendly.

One issue cited behind the scenes for companies who avoid including a retail element in their IPO is the extra work involved, including the required gap of six working days between the publication of a prospectus and the end of an offer.

This seems to be a legacy of a time when prospectuses would have to be printed and physically posted out to people. In a digital age where these documents can be accessed instantly this timeframe could conceivably be shortened.

WHAT IS AN IPO AND WHAT ISN’T?

An IPO is a process whereby a private company sells shares to investors and lists them on a stock market.

The amount of the company offered in an IPO can vary, though is typically around 20% to 30% with the remainder left in the hands of founders, initial investors and early employees. Often these holders will take advantage of the opportunity to sell their more easily traded shares in the company over time.

Two different types of new issue on the stock market come under the IPO umbrella: offers with an allocation to retail investors; and the much more common example where new shares are only offered to large institutions like asset managers and investment banks.

As AJ Bell’s head of dealing Peter Lockyer explains the latter could be more accurately described as a ‘private placing’ rather than
an IPO.

In both cases so-called lead managers in the form of independent financial institutions are appointed to help with tasks like the preparation of documents, finding willing buyers for the stock and setting the price at which shares will be issued.

The other main way a company joins the stock market is through an introduction to the market or a direct listing as it is known in the US. These aren’t underwritten by institutions; instead existing investors will convert their ownership stakes into shares that are listed on a stock exchange – which can then be purchased by institutional and retail investors.

Examples going down this route in the US include Roblox, Spotify and workplace messaging platform Slack. Closer to home bottling firm Coca-Cola European Partners (CCEP), which previously traded on the Euronext exchange, and gold miners Wheaton Precious Metals (WPM) and Yamana Gold (AUY) (which had existing stock market listings elsewhere), are examples of firms which have been ‘introduced’ to the UK market.

HOW DO YOU PARTICIPATE IN AN IPO?

If a company includes a retail allocation in their IPO offer, then the process will run as follows:

– Investment platforms will often set up a mini site on their website including information about the offer. The retail allocation will typically be evenly distributed among the major investment platforms by the underwriters or lead managers of the issue.

– Once the offer is open you make an application for the number of shares you want to buy before the closing date. Sometimes there will be limits on the number of shares you apply for.

– Timings vary but a few days after the offer closes you will find out how many shares you have been allocated. Typically, if an IPO has been oversubscribed you will be scaled back.

An intermediary called PrimaryBid has started to provide retail investors with access to a few IPOs, such as cannabinoid products group Cellular Goods (CBX:AIM) in February and forthcoming listings from Deliveroo and Parsley Box, the latter providing ready meals aimed at older people.

You set up an account with PrimaryBid and apply for the shares once each offer goes live. Once the investment is confirmed, the intermediary transfers the shares into your dealing account held with an investment platform provider.

Should you want to hold the shares inside a tax wrapper, you would have to do something called ‘Bed and ISA’ which involves a back-to-back sale of the shares and repurchasing them in your ISA, or a ‘Bed and SIPP’ which is the same process but putting the stock in your self-managed pension.

Taking part in the Deliveroo IPO

Takeaway firm Deliveroo will make available £50 million worth of shares for retail investors as part of its planned IPO. This is likely to be a very modest chunk of the overall offer given the expected valuation of £7 billion to £8 billion. Investors have the option of applying for tranches of £250, £500, £750 or £1,000 worth of shares.

To participate you need to be a Deliveroo customer (though you can qualify with a single food order). More loyal customers will get priority should demand exceed supply in the IPO offer.

The retail offer is being facilitated by PrimaryBid, a platform which provides access for private investors in company fundraisings. Effectively it is acting like another lead manager on the IPO.

Deliveroo’s founder and CEO Will Shu will get class B shares, and everyone will get class A shares. Class B shares will carry 20 votes for every share held and class A shares will carry just one vote. The B shares will convert to A shares after three years. Only class A shares will be offered in the IPO.

HOW TO GET INVOLVED IN IPOS IF THERE ISN’T A RETAIL OFFER

There are some avenues available to get involved in IPOs which don’t have a specific allocation to retail investors.

AJ Bell’s head of dealing Peter Lockyer says that if a customer got in touch about an IPO which was being marketed to institutions and AJ Bell knew the lead manager on it, the investment platform would try and secure some stock but points out that the resulting allocation, if any, would often be very modest.

In this case and with private brokers which facilitate access for individuals to IPOs you would need to be deemed to be a ‘qualified investor’ which would mean self-declaring as either a high net worth individual or sophisticated investor.

The other option is to buy the shares after they have joined the market. Unfortunately, a common complaint among investors is they cannot trade the shares online immediately, with newly floated stocks not appearing on a platform until later in the day.

AJ Bell’s Lockyer says: ‘It can take time for the required data to feed through, but that doesn’t mean you can’t pick up the phone and place a trade straight away.’

FEAR OF MISSING OUT

While some people may be keen to get involved in a float you should never rush to buy stock purely in fear of missing out.

What often happens is the price of a newly listed stock may go up, then back down slightly a few days later as short-term investors take profit, before heading back up as longer-term investors build a position. That means there is plenty of time to research a stock and decide at what price you’d be happy to buy, if at all.

For example, Cellular Goods is still up on its 5p issue price at 13.26p but is down significantly on the 30p price at which it peaked on the first day of dealings (26 Feb).

Some investors will avoid investing in a newly listed company until it has demonstrated its credentials and built up a track record in terms of its financial performance. It can take time to adapt to life as a public company with the extra demands and scrutiny that brings.

After all, not all IPOs are a success. For example, luxury car manufacturer Aston Martin Lagonda (AML) has seen its share price fall more than 90% on the £19 per share IPO in October 2018 once you consider the impact of a share consolidation.

Expectations were clearly set too high for Aston Martin when it joined the market, leaving plenty of room for disappointment as its sales decelerated even before the pandemic hit.

A company which, at least to date, has achieved the reverse of this in terms of managing expectations is THG (THG) or The Hut Group as it’s more commonly known.

The beauty and sports nutrition e-commerce specialist has raised forecasts multiple times in the six months since debuting in London in September 2020, suggesting it was deliberately conservative with its guidance to help give itself as smooth a start as possible to life as a public company.

Another successful IPO with a slightly longer track record is cyber security specialist Avast (AVST) which is up more than 80% since joining the stock market in May 2018 as it has benefited from the growing importance attached to its services in an increasingly digital world. The share price gains have been underpinned by solid organic growth in revenue, profit and cash flow.

DISCLAIMER: The author of this article (Tom Sieber) and the editor (Daniel Coatsworth) own shares in AJ Bell.

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