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One year on from widespread market uncertainty driven by the arrival of the COVID-19 pandemic, we’ve found ourselves in the midst of an IPO surge that’s broken a whole host of records and is only gathering momentum.
In May 2021, a Refinitiv report showed that 670 initial public offerings had already raised a total of $140.3 billion this year. The sheer volume of money raised is four times greater than the same period last year.
(Image: PwC)
As the table above illustrates, the number of IPOs entering the market and their proceeds have been snowballing at a rapid rate since the arrival of the health crisis. In fact, the 670 initial public offerings over the first five months of 2021 has been the highest for two decades. The last comparable period can be found way back in the height of the dot-com boom, where in 2000 we saw 667 IPOs enter the market whilst raising $82.3 billion. In terms of money raised, the first five months of 2021 arrival on Wall Street come second only to the $91.8 billion generated by 503 IPOs in 2007, according to the Refinitiv report.
Significantly, whilst 2020 saw an acceleration in the volume of IPOs coming to market, the investment landscape also welcomed a significant volume of new retail investors who have been ready to place their money into appreciating assets rather than storing wealth in banks.
While discussing the new influx of investors onto the marketplace, Maxim Manturov, Freedom Finance Europe’s head of investment research expressed his belief that the COVID-19 pandemic contributed to creating favorable conditions in welcoming new investors.
“What we have analyzed above actually looks like the consequence of the pandemic and the stimulation packages that followed. This created a pool of funds retail investors could start investing into stocks,” claimed Manturov. “As per Fidelity report, there were 26M retail accounts in 2020, i.e. up 17% compared to 2019, while the daily trading volume doubled. People in the US traded about 90% more stocks than the week before they received their stimulation funds.”
While retail investors and IPOs don’t always go hand in hand, it’s reasonable to link new investors entering the market to the confidence in which countless new businesses are tapping into when going public.
Retail’s IPO Investment Hurdles
Traditionally, IPOs and retail investors are rarely linked. This is because there are some significant hurdles that stand between initial public offering shares and retail account holders.
Why is this the case? Well, let’s take a deeper look into the initial public offering process. When a business opts to go public, it issues stock with the intention of fundraising capital. Initial offerings are then underwritten by an investment bank that buys and distributes the shares to a range of buyers and investors.
The primary aim of these investment banks is to ensure that shares are purchased in an efficient manner, which generally leads to them favoring institutional investors that have deeper pockets and are capable of buying large volumes of shares in a single transaction. While it’s possible to open up IPOs to larger volumes of retail investors, this process is generally more time-consuming and will involve leveraging far more transactions.
To further illustrate this point, we can imagine the dichotomy of selling one million shares to an institutional investor that’s willing to pay for a huge volume of shares or breaking that million into tiny pieces that can be offered out to retail investors to hoover up, leading to a more arduous process of generating interest and facilitating transactions.
Although these hurdles have existed for many decades, technology is evolving to make it easier than ever for retail investors to gain access to IPO shares where it would otherwise be impossible to invest.
New Opportunities Emerging in Retail Investment
Retail investors are becoming increasingly interested in buying the debuts of companies preparing to go public. Although institutional investors still get the lion’s share of IPO shares, technology is evolving to level the playing field. For instance, Deliveroo enabled customers and members of the general public to invest in its initial public offering via PrimaryBid, a platform that offers access to pre-IPO investments.
Despite gaining access to the shares, conditional trading restrictions meant that investors were forced to hold their position for a week following Deliveroo’s first day of trading – leading to a heavy level of losses across the board as the delivery company slumped to become one of the worst performing IPOs in the history of the London Stock Exchange.
There are many online brokerages available today that enable users to buy into IPOs, however, these platforms typically reserve the purchase of shares for larger portfolio holders who are able to meet significant financial thresholds – typically over $100,000.
Perhaps the most significant bridge between retail investors and IPOs has already been developed by retail investing app, Robinhood, which recently announced its IPO Access feature while planning on going public themselves.
The company, which recently launched its own IPO, is setting up the investing platform to be released over the coming weeks and months as a means of achieving its mission of ‘democratizing finance.’
Significantly, the IPO Access feature will make investing in initial public offerings a straightforward process for investors. There’s also no minimum financial thresholds for users to meet – a factor that’s rarely been seen in the IPO investment landscape.
In a blog post accompanying the announcement, Robinhood said that “most IPO shares typically go to institutions or wealthier investors. With IPO Access, everyday investors at Robinhood will have the chance to get in at the IPO price.”
Although there are still hurdles that exist between the rapidly expanding IPO landscape and retail investors, more services are actively working to address this imbalance to open up business shares to everyone. With greater levels of initial public offering access to all, we can continue working towards achieving a fair market for all participants.
