How To Invest In An IPO – Forbes Advisor UK

Initial public offerings (IPOs) provide the public with an opportunity to buy when a company lists its shares on a stock exchange for the first time.

There are many examples where a successful IPO has given investors instant stock gains.

But it’s not always easy. There are also many instances where an IPO has resulted in shareholders suffering significant losses thanks to a falling share price after public trading began.

Last year was a record time for IPOs on the London Stock Exchange (LSE). In contrast, difficult market conditions in 2022 mean activity has fallen off a cliff this year.

Still, German automaker Volkswagen managed to buck the gloomy mood last month with a billion-dollar IPO of its Porsche subsidiary.

Here’s a closer look at IPOs, including the potential benefits and risks for investors, as well as how some recently listed UK companies have fared.

Investing is speculative and your capital is at risk. You may lose all or part of your money.

What is an IPO?

An IPO is the process by which a private company first offers its shares to the public.

The newly issued shares will be listed on a stock exchange such as the LSE or NASDAQ in the United States. The process is often referred to as “going public” or “floating”.

There are a number of reasons a company might decide to go public. For example, an IPO offers existing investors, including founders and employees, the opportunity to sell a portion of their shares.

It also allows corporate supporters, such as B. Private equity firms to cash out their investments.

Companies may also choose to go public to raise additional capital for expansion and acquisitions and/or to reduce debt. Companies sharpen their profile by “going public” and can secure preferential conditions when borrowing.

At the same time, listed companies face closer scrutiny and additional regulations such as disclosure requirements and reporting of results.

They also require shareholder approval for corporate activities, including determining executive pay and proposed divestitures or acquisitions.

IPOs are often heavily priced to ensure the issuance of shares is fully subscribed and to reward investors with an increase in share price on the first day of trading.

There is typically a 90 to 180 day lockup period during which existing and large investors are prevented from selling their shares to support the share price in the early trading days.

How have recent IPOs fared?

Luxury car maker Porsche recently made its IPO debut by listing on the Frankfurt Stock Exchange at a valuation of €75 billion – a record for a European IPO.

The IPO price of €82.50 per share was at the high end of the valuation range and allowed parent company Volkswagen to redeem part of its stake.

Despite the difficult current stock market conditions, the Porsche share has held up well so far, and the shareholders are sitting on price gains of around 6% at the beginning of October 2022.

For the broader IPO market, however, the picture has been less rosy this year.

According to consultancy Edison Group, the majority of IPOs launched in the US and Europe since early 2020 are trading below their issue price, with half down at least 50%.

The table below shows the subsequent share price performance of some of the better known companies to list on the LSE since last year.

With the exception of food delivery company Deliveroo, all IPO investors could have made a substantial profit if they had sold at the highest share price, typically around six months after the IPO.

However, against a backdrop of falling equity markets and broader macro concerns, all stocks except for tech company Darktrace are currently trading well below their IPO price.

In the case of online card retailer Moonpig, Deliveroo and consumer review site Trustpilot, shareholders investing in the IPO stage have currently lost more than half the value of their initial investment.

The worst IPO victim is Deliveroo, whose share price fell by more than a quarter on the first day of trading alone. The company has faced a perfect storm of corporate woes, from a dispute over driver pay to a slump in demand since lockdowns ended.

Cybersecurity firm Darktrace’s IPO was more successful for investors, with its share price nearly quadrupling by September 2021. Although the share price has subsequently fallen, investors are currently sitting on a post-IPO gain of around 20%.

Why are these newly IPO companies struggling to justify their IPO valuations? This is largely due to broader economic woes that have caused stock markets to plummet over the past year due to high inflation, rising interest rates and geopolitical issues.

The market downturn, coupled with high volatility, has reduced investor appetite for newly launched companies, which are perceived as riskier assets due to their shorter public track record.

Should You Invest in an IPO?

Danni Hewson, financial analyst at trading platform AJ Bell, suggested these thoughts to investors considering investing in an IPO: “IPOs create headlines and excitement. They can also create an instant “pop” for investors, a rapid rise in the stock price on day one, which is why there has been so much effort to give retail investors more exposure to this part of the market.”

But Ms Hewson says there are downsides to consider too. “There’s a popular theory that the pop is born because IPOs are priced at a discount to encourage investors to invest their money in companies that don’t have a track record as a public company.

“The past year has seen many examples of market darlings that turn into cautionary tales once the dust settles.”

Investment experts say investors need to use the same strategy when investing in IPOs as they do with any of their investments, which means understanding the business and asking whether it has a strong competitive position in its sector, whether management is sound, and whether the issue Price is fair.

If investors are happy with the answers to all of these questions and are confident that the investment fits into their overall investment strategy and risk tolerance, this is an option worth considering.

How to buy shares in an IPO

While they offer companies an opportunity to expand their shareholder base and increase customer retention, IPOs definitely present a challenge for individual investors like you and me who want a piece of the IPO action.

AJ Bell reports that retail investors were invited to participate in just 7% of IPOs on the LSE over the three years to October 2020. As a result, investors are typically limited to trading once the shares are listed.

The firm said: “Unfortunately too often advisers (of companies) recommend that they only make the offering available to institutions, without a retail offering, because it’s seen as easier, faster and the way it’s always done.”

However, retail investors may be able to subscribe to some IPOs through trading platforms that offer the REX service (provided by brokerage firm Peel Hunt) or PrimaryBid (an outside service that facilitates IPOs).

Calendars of upcoming IPOs can be found on trading platforms and the London Stock Exchange, although these are usually only a few weeks in advance.

What are the prospects for IPOs?

After a record-breaking 2021, IPO activity has slowed dramatically. Global IPOs fell 73% year over year in the first nine months of 2022, according to research provider Trading Platforms.

A similar trend was seen in the UK, where accounting firm EY reported that just 26 companies went public on the LSE in the first six months of this year, compared to almost 50 in 2021.

Global equity markets have faced continued macroeconomic and geopolitical headwinds this year. High commodity prices and interest rate hikes, combined with the impact of high inflation on consumer spending, have created uncertainty about future cash flows for companies seeking IPOs.

As a result, IPOs are likely to remain cautious pending a sustained upturn in global equity markets and a drop in current volatility.