An initial public offering (IPO) refers to the process of offering shares of a private company to the public in a new share issuance. A Public share issuance makes it easier for a company to raise capital through investors. An IPO offers current private investors the opportunity to realise gains as a result of the investment through the sale of shares publicly, while the offering allows new public investors to now participate in the company performance through share ownership.
Obtaining access to IPOs
When a company decides to go public, its either done as an exit strategy for private investors, to raise capital for future growth or a mixture of both. IPOs are usually discounted to ensure sales, which can attract many willing investors on primary issuance. The initial price of an IPO is set by the underwriters through their pre-marketing process. At the core, the valuation of the company is made using fundamental techniques such as revenue, growth, and profitability to name a few.
For investors, trying to analyse an IPO can be difficult due to the private nature of the business before being made public, however the prospectus can be used analyse certain fundamental metrics and this must be made available to potential investors on registration of going public. Successful IPOs usually have the support of large institutional investors such as investment banks. Interest in the listing can be tracked in the media as well as updated prospectus documents.
The pre-marketing process is aimed at large institutional and private accredited investors and this demand influences the price on listing day. Investors in the public do not become involved until the final offering day. The most common way for an individual investor to gain access to an IPO is to have a brokerage platform that itself has received an allocation of shares that wishes to share with their clients. The other is to wait for listing day and enter a bid at market as the market opens or try and acquire the share at market price throughout initial trading day. The price may have increased, however for long term investors it means access to a share that has been tracked in the media and has the expectation to continue increasing in value post the listing.
In closing
There will be listings that will not perform as expected and its up to you as the investor to perform the necessary due diligence through media and prospectus analysis to determine the winners from the losers. Understanding the IPO process will make you a more knowledgeable investor and put you in good stead for generating yield going forward.
