How to invest in IPOs in the UK?

Summary

  • IPOs have been one of the most preferred routes for raising money
  • Investors can bid for shares in lots during the IPO process
  • IPOs seem very lucrative as some get massive listing day gains

Initial public offerings (IPOs) have been one of the most preferred routes for raising money by the corporations as it allows a complimentary word of mouth publicity for the business, as well as the leading products and services associated with it.

From an investors’ point of view, a large section of institutional investors, big-ticket buyers (the high net worth individuals), and financial institutions look forward to booking a sizable stake during the bidding process. Interestingly, IPOs are one of the offerings of the stock market that considerably develop excitement amidst the retail section of investors as a major chunk of them invest money in order to book listing gains.

Investing in IPOs

All the market participants that are willing to participate in the IPO bidding process can place their respective bids in an orderly fashion during the open market hours or the time period ascertained by the stock exchange for IPO bidding procedure. All such requests can be transferred through a registered share broker who are authorised to provide bidding facility to the clients.

The investors can bid for shares in lots during the IPO process, as one can’t acquire a single share. All the corporations have different lot sizes, certainly with the different issue prices. The shares are allocated on a random basis, while a number of bidders didn’t receive any shares following the allotment if the initial share sale is oversubscribed.

In order to capitalise on the listing day gains, as well as the medium-term capital gains, a number of investors buy multiple lots, preferably from different broking accounts.

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Notably, there is a section of investors who look to maximise their gains, over and above the notional appreciation on the listing day. The shares of a particular corporation which is planning to unlock the listing potential are also available in the grey market, the pre-IPO window.

In order to apply for these shares, a number of financial intermediaries conduct private placement of shares, as well as auctions in which the bidders receive the shares at a relatively lower price as compared to the final issue price decided by the financial advisors and the book managers to the company for the purpose of an IPO.

Possible case of oversubscription

Different initial share sales have varied objectives, as most of the companies purportedly state that they want to explore the benefits of listing. Majorly, a large number of IPOs have seen their co-founders selling off a major chunk of their respective shareholding or putting across the entire stake in the share sale to maximise the gains.

Likewise the stocks, IPOs also garner deep-rooted interest of the investors with some of the share sales witnessing a record-breaking bidding, effectively leading to oversubscription by multiple times the initial size of the IPO prescribed by the book leading managers. While, on the other hand, some IPOs remain undersubscribed. This happens, primarily because of any existential debt burden on the company, or the nature of business, the vision of founders/management etc.

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Multinational corporations (MNCs), the who’s who of the corporate world, often get huge interest developed for their IPO plans, largely due to maximised media coverage and heavy-weight investment banks acting as their sole dealer, book lead managers, advisors to the issue.

Rationale of investing

The investors who are not allocated any shares during the IPO process, often wait for the listing on the bourses to buy the shares at a price that is more stabilised as compared to market price of shares achieved immediately after the stock market debut.

Investing in IPOs may seem very lucrative as some corporations even offer a marginal discount for retail investors in the share sale to lure them for bidding. Also, some investors believe that acquiring the shares of a company during the very initial years of its capital market debut will be better in the long-term as the cumulative return would be higher as compared to the share purchased after one or two years of the listing.

This may not happen with all the companies as some corporations witness massive erosion of market capitalisation even after a stellar stock market debut and a benchmark beating return for a couple of years.

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