Shares magazine have reported that the CEOs of major platform operators AJ Bell, Hargreaves Lansdown and Interactive Investor have written to Government Minister Jon Glen asking him to consider the rights of retail investors in IPOs. Long gone are the days when new company listings were advertised in newspapers and retail investors could subscribe, and frequently “stag” the issue to make a quick profit. Nowadays institutional investors are typically offered shares in a placing and retail investors are excluded from participating.
The letter quotes recent examples of THG (Hut Group), Dr Martens (DOCS) and Moonpig (MOON) where retail investors could not participate and also says that between 2017 and 2020 they were excluded from 93% of share launches.
Bearing in mind that those companies now trade at a premium to their launch price, you might think that retail investors have been missing out, although there was nothing stopping investors from buying the shares in the market soon after they launched when you would have had to pay little more. Are these platform operators really acting in the best interests of retail investors in promoting the idea of wider retail participation though? I tend to take the contrary view.
Share prices after an IPO can be extremely volatile in the short term. That is particularly so now that so many companies launch an IPO with a short track record and no profits. In the long term, IPO stocks actually underperform the market. A paper by Jay Ritter noted this: “in the long‐run, initial public offerings appear to be overpriced. Using a sample of 1,526 IPOs that went public in the U.S. in the 1975–84 period, I find that in the 3 years after going public these firms significantly underperformed a set of comparable firms matched by size and industry”; and “There is substantial variation in the underperformance year‐to‐year and across industries, with companies that went public in high‐volume years faring the worst. The patterns are consistent with an IPO market in which (1) investors are periodically overoptimistic about the earnings potential of young growth companies, and (2) firms take advantage of these “windows of opportunity”.
In other words, companies take advantage of good market conditions and insiders know best when to sell. Recent market conditions have therefore been good for IPOs.
I did have a quick look at the prospectus for Doc Martens as a long-standing wearer of their boots and shoes which I can highly recommend. But I was not impressed enough to buy the shares. For example, the company does not even own the brand names it uses. The product is easy to copy also.
Moonpig also appears to me to be wildly optimistic about future prospects given that its business model (delivering cards via internet orders) is surely highly replicable once other businesses realise how much money there is to be made from such a simple business model. Moonpig has also benefited from the short-term impact of the Covid epidemic which has reduced conventional retail sales of greeting cards.
THG certainly have a very well designed and flashy web site, but its cosmetic and health brands hardly seem unique in a crowded market for such products. The company also has a patchy record of profits.
In essence I can understand why platform operators would like to support the demand by retail investors to get into the next “hot” stocks when launched but the investors would be wiser to step back and wait for the initial enthusiasm to abate. Or at least take a very skeptical view of new IPOs and take a careful read of the prospectus which few retail investors do. Those companies that are IPOs of companies held by private equity investors which they have geared up with debt are ones to be particularly careful about as they know when is a good time to sell and often look to get out in the short term.
Of more concern to me is the discounted placings of shares in existing listed companies where private investors are definitely disadvantaged. That is a problem that does need tackling I suggest.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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