Private investors have traditionally been bit-part players in the broader IPO landscape. Consistently excluded from new issues, often regarded as too short-term, unpredictable and complicated to include in the process, the perception was that (outside of government privatisations) the city didn’t really like private (also known as retail) investors.
However, attitudes are changing, and while that inevitably tends to happen slowly, we have been involved in marketing significantly more IPOs to private investors in the last couple of years. It is no longer complicated to add a retail component to a share offer, and the significant levels of demand generated for new issues that have been offered to (increasingly sophisticated) private investors have highlighted the potential of this part of the market.
There is significant demand among private investors for access to IPOs, according to Barclays Stockbrokers: ‘There continues to remain a high level of interest in IPOs, particularly among those investors who have previously made this type of investment. In a recent survey conducted by Barclays Stockbrokers, 81% of investors who have participated in two or more IPOs confirmed they are interested in investing in IPOs in the future, with 49% stating that IPOs are not offered frequently enough to retail investors.’
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Technology has played its part in simplifying the engagement process with private investors, and things like paper application forms are (thankfully) now largely a thing of the past. Websites and platforms allow stockbrokers to aggregate orders from private investors who choose to run their own portfolios, and private client wealth managers do the same for their clients, where individuals choose to pay for advice around their investments. Both pools of retail capital can be accessed at IPO, and are now increasingly being asked to take part in an ‘intermediaries’ offer during an IPO. The IPO of TSB in 2014 was an example of how this process can work incredibly successfully – 57 different intermediaries took part, and £150 million was raised from thousands of retail investors.
1.‘Retail investors will sell immediately after the IPO’
A common perception that is fundamentally inaccurate. Clearly any set of investors will contain groups that have different time horizons. Just as some institutional investors will sell out of a security within the first days or weeks of trading, so will some retail investors. However, in the private-investor sphere, these are a minority; retail investors are generally long-term, supportive shareholders.
One year following the Royal Mail IPO, a substantial number of the top institutions had sold out of the shares – Bloomberg data showed that eight had reduced their stakes by 90%. We compiled data showing (around ten months post the IPO) that holdings in the stock among a group of private client stockbrokers that took part in the offer were only down c30%. This was backed up by figures quoted in the FT in July 2014 (the IPO was in October 2013) stating that 76% of individual investors still owned the shares they acquired.
2. ‘Yes, but are they long-term investors?’
Part of our business runs investor meetings with already-listed companies for private client wealth managers – an opportunity for them to speak to investor relations and management teams in stocks they are investing in on behalf of their retail clients. All the evidence we see is that this part of the market buys and holds equity investments on a long-term basis.
Barclays Stockbrokers have said that: ‘Retail investors show characteristics of being long-term holders of the shares, with 76% investing in IPOs holding the shares for more than one year and 42% for more than 3 years.’ According to Capita Asset Services: ‘On average, retail shareholders hang on to a share for five years, much longer than the two-year holding period of institutional and foreign investors.’
3. ‘Involving retail investors in the IPO process is complicated’
In days gone by, perhaps, yes. But this certainly doesn’t apply today. An IPO can be marketed to retail investors through a number of channels, and all coordinated alongside the institutional offer. The typical route – the intermediaries offer – is managed by an advisor who works alongside the syndicate banks, who are selling shares to their institutional clients. Retail investors apply for shares through their stockbroker or platform, and these are aggregated and placed into the Order Book. Shares are then allocated according to the level of overall demand for the offer.
Private investors should be a consideration for any company listing on the UK market. Indeed, the CEO of the London Stock Exchange Group has stated that he believes up to 20 per cent of floats should be made available to the public: ‘Doing so would create some excitement around new issues and give retail investors the chance to make some money … At the moment, many initial public offerings end up in the hands of a few of the same institutions.’
This doesn’t mean that absolutely every deal in the future will be offered to private investors, but there is no reason why the majority of new issues shouldn’t have a retail component at IPO, as part of building a balanced share register.