Potential investors are attracted to new IPOs as they can reap big gains, but they can rack up huge losses. We reveal everything you need to know before you invest.
What is an IPO?
When a company floats on the stock market via an Initial Public Offering (IPO), investors can respond in several ways – with excitement, disappointment or even a more lukewarm response.
IPOs essentially offer the first sale of shares in a company before it floats on the stock market.
But before the company even debuts, there is much work to be done by both the business and potential investors.
This guide will help you discover future IPOs, find essential information and risks you need to be aware of, as well as how to invest.
How can I discover new IPOs?
Investegate is a useful source for all investors – regardless of whether you’re starting out in the world of investing or if you have more experience.
You can find the latest financial results from listed companies, as well as which businesses are planning to float on the UK stock market.
One of the easiest ways is to search for ‘intention to float’ or ‘Schedule One’ under the Keyword option.
You can usually find a treasure trove of details in these announcements, including:
- An overview of what the company does;
- An ‘expected’ admission date;
- How much is expected to be raised on admission;
- Details of directors and major shareholders;
- Details of the broker and nominated advisor
You may find out the number of shares being sold and potential pricing, but this is more likely to be disclosed closer to the time.
Look out for ‘announcement of offer price’ on Investegate, which may confirm the set IPO price and reveal the estimated valuation of the company in question.
It’s possible the admission date may change, so be sure to keep up to date with any ‘Schedule One’ updates.
There also may be speculation about IPOs in financial publications and mainstream newspapers, but you should note some of these may never materialise.
At the moment, speculated IPOs include budget supermarket Asda and medical cannabis firm Jacana.
What do I need to read?
If there’s one document you absolutely need to look at (even if you don’t read every single page), it’s the admission document, sometimes referred to as a prospectus.
Admission documents are issued by the company before floating on the stock market and tend to be several hundred pages long.
You shouldn’t be surprised by the length as it includes everything you need to know about the business.
Admission documents should include details of:
- Risk factors;
- A timetable of events;
- Share pricing information;
- An overview of the market or sector that the firm operates in;
- Historical financial information;
- Debt levels;
- A list of directors and major shareholders;
- Business strategy and the company’s outlook
Obviously, it will be difficult to read everything so you should focus first on how the business makes money.
If you don’t understand how the company makes money or are unsure if they can thrive in a difficult or competitive market with its strategy, that may be a red flag.
You should also look at market trends and evaluate whether these sustainable or are likely to be short-lived.
Also, take note of the management and major shareholders, as well as any shareholders selling before the IPO as they may have a good reason to.
“If management and previous owners are staying with the business and retaining a stake, that is a good sign,” says Rebecca O’Keeffe, head of investment at Interactive Investor.
“A possible danger sign is if a company’s owners are getting out altogether – sometimes an IPO is the exit strategy for a private equity firm.
“In these cases, it is vital to look at the company’s balance sheet as well as its profit and loss statement (P&L).”
You shouldn’t overlook the financial historical information as it’ll reveal if the firm is loss-making, generating any sales or if it has a lot of debt.
“Over-leveraged companies can end up drowning in debt, so you need to look carefully at leverage as well as the usual investment metrics,” advises O’Keeffe.
Unfortunately, you should also consider if a business does struggle, they may come cap in hand looking for more cash.
What are the risks?
A vital section to look at in any admission document is the risk factors as this will help you understand what could go wrong.
“The big risk is that the company floats at too high a price and then the share price collapses in the short term,” warns Adrian Lowcock, head of personal investing at Willis Owen.
An example of this is Aston Martin Lagonda, which Lowcock believes had an ambitious valuation (on par with Ferrari) followed by disappointing results.
In the US, O’Keeffe believes the debut of Uber has been a “bit of a let-down” for investors after questions emerged over its long-term prospects.
“Within the IPO prospectus it warned investors that it may never make a profit, but that didn’t put investors off,” comments O’Keeffe.
“Its shares fell on IPO day and since then the performance has been lacklustre.”
Why you should ignore the hype
It’s important not to get distracted by too much hype warns Lowcock, citing the recent success of Beyond Meat’s IPO in the US as the share price has rocketed.
“The risk now is that investors are going to get burnt if and when the share price comes back to earth,” says Lowcock.
The best way not to get caught out is to do your own research.
If a company has not yet made a profit, look at other investment metrics to discover the health of the business.
What should I consider before investing?
“The first thing is to decide what your plan is with your investment,” advises Lowcock.
“Are you looking to buy and hold for a long time, or perhaps jump on the publicity that can surround a new IPO and make a quick profit?”
Lowcock warns if you’re looking to make a quick buck, the price you pay will matter in the long run, while the short-term performance could be a huge distraction.
He believes IPOs are being valued very highly as investors hunt for above-market growth during a time when disruptive technology and exciting themes can dominate market attitudes towards a new IPO.
“Such businesses are often not valued using traditional metrics,” comments Lowcock.
“But some things will always remain important – what is the market size potential, how scalable is a business, what is its unique selling point and how much money is it borrowing.
“Then you have to decide whether the price is worth paying for the potential.”
How do I invest in an IPO?
If you’ve done your research and are happy to invest in a company planning to float on the UK stock market, how do you invest?
You can use an Individual Savings Account (ISA), Self-Invested Personal Pension (SIPP) or dealing account to invest in eligible IPOs via investment platforms.
O’Keeffe recommends checking if an investment platform allows you to take part in IPOs before opening an account.
But you also need to check whether retail investors can invest in the soon-to-be listed company as this may not always be the case.
If retail investors are not allowed to participate in the IPO, they can only buy shares in the company when it starts trading on the stock market.
Institutional investors and potentially staff are usually eligible to buy shares before the company debuts on the stock market.
According to AJ Bell, all firms have an ‘offer period’ that can last between a few weeks and a month, offering time for you to study documents and place an order if you choose to.
Unfortunately, there won’t be a set share price at this time, so you need to state how much you want to invest – with some firms requiring a minimum investment of at least £1,000.
The IPO price tends to be revealed within two days of the offer period closing.
Best and worst performing IPOs
While investing should always be long-term, it may be worthwhile to see how UK IPOs have fared over a one-year period to see the short-term gains and losses you may incur.
PricewaterhouseCoopers have revealed the best and worst UK IPOs of 2018, relative to the FTSE All Share Index.
Below is the table of the five best (and worst) UK IPO performance last year – determined by their share price performance.
Click on the graph for a larger image.
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