Incredibly, despite the Covid-19 pandemic, 2020 became the stage for the highest IPO activity in a decade, with across 1,591 listings across the year representing a huge 42% rise over 2019. With the initial public offering space gathering momentum ahead of what appears to be another significant year, it?s imperative that investors navigate the space effectively to avoid getting stung.
One of the key driving forces for this resurgence has been the re-emergence of SPACs sponsored by reputable asset managers or key industry players. Although SPACs haven’t always been a hit with investors, better regulatory conditions and a number of recent successful acquisitions have ensured that SPACs activity is flourishing at the start of the new decade.
As we can see in the data above, IPO proceeds have accelerated to their highest level since 2007, with the rise generated by an unprecedented number of SPACs.
As Covid-19 vaccines begin to rollout through 2021 and economic activity begins to normalize, we’re likely to see businesses re-engineering their financial statements to an economic environment of recovery, and can expect to see capital raises for businesses to start expanding and investing in their growth and investment – leading to a sizeable ripple effect in economic activity.
This activity is likely to lead to more IPOs becoming available throughout 2021, and with significant names like Coupang, Rivian, Coinbase, Robinhood, and Databricks set to go public in the near future, there may be more investor interest than ever in initial public offerings.
However, buying into an IPO is a fundamentally different process from buying into stocks. Private companies are significantly harder to source information from, meaning that there can be a great deal of guesswork and conjecture involved in valuations and market predictions. Let’s take a deeper look into the importance of finding objective research when considering taking the step to buy into an initial public offering:
Finding Value in High Volume Information
Finding an IPO to invest in is nothing like picking high-potential stocks. When a company launches an initial public offering, it typically comes with a flood of information and analysis on the firm and the prospects of the issue. Scores of stock analysts and business news websites will cover the subject in great depth and offer their respective recommendations. However, it’s important to note that not all insights and critiques will be entirely objective. As research houses analyze stocks from different points of view, retail investors may struggle to focus on the key points.
Phani Sekhar, a fund manager at Angel Broking said: “An IPO prospectus is an exhaustive guide that provides comprehensive details of the firm’s business, history, track record and finances. It may not reflect the true worth of the firm, but it makes the job of an investor relatively easier.”
With this in mind, what information is it important to look for when you access an IPO prospectus of a potential company to buy into? Maxim Manturov, Head of Investment Research at Freedom Finance Europe, says: “Research is always a top priority. First things first, one should pay attention to how the company’s earnings rise and its potential TAM. It is also advisable to explore the company’s products and what needs they cover, the company’s financial condition, and liquidity. A healthy debt-to-assets ratio, renowned IPO underwriters, and suggested ways to use the raised funds are also worth paying attention to. The more information one can get, the deeper understanding one will have. This is as correct for IPOs as for selecting a company to invest in general, including SPAC and regular stocks. You should know as much as you can about the company in question, because it will both provide you with confidence and an opportunity to take urgent measures in case anything goes wrong; in other words, this is about risk planning and management.”
Here, the key thing to consider is the purpose of the issue. If the firm is looking to retire debt, for instance, how will it impact the firm’s margins and revenue? If the money raised through the issue will be used for expansion, is it going to improve the firm’s position on the growth and revenue fronts?
Because private companies aren’t typically littered with analysts covering them in a bid to spot inconsistencies, it’s more important than ever to find information you trust. It’s worth noting that although many companies look to fully disclose all information in their prospectus, it’s still written by them and not by an unbiased third party.
Be sure to look online for information regarding the company and its competitors, financing, press releases, and the general health of the industry they’re in. Although it may be hard to find fresh insight, this form of research offers a good learning curve surrounding the company and industry that you’re looking to invest in.
On the other hand, your research might lead to the discovery that a company’s prospects are being overblown and that not acting on the investment opportunity is the best option.
Look to Companies With Strong Brokers
Always pick a company that possesses a strong underwriter. While big investment banks can definitely bring their fair share of successes, generally speaking, quality brokerages are most likely to be associated with high-quality companies. However, it’s vital to take caution in selecting smaller brokerages because they could be willing to underwrite any company. For instance, Goldman Sachs can use its reputation to be much pickier about the companies it underwrites than smaller underwriters can.
One advantage of more boutique brokers is that their smaller client base makes it more straightforward for individual investors to buy pre-IPO shares. However this approach could be something of a red flag. It’s important to note that many large brokerage firms don’t allow a user’s first investment to be an initial public offering. Typically only long-standing individual investors get in on IPOs and they typically come in the form of high-net-worth customers.
Use The Right Tools Available
As we’ve already touched on, it’s important to avoid trusting the views of a third-party website when it comes to assessing the true viability of an initial public offering. However, there are plenty of more trustworthy tools available to help you to make a more informed decision.
Notably, one of the best ways to gain more qualitative research on the matter is to consult Qualified Institutional Buyers (QIB) data on the company in question to determine the viability of their business plan and whether their IPO intentions can be achieved.
There’s likely to be accessible information regarding the company’s annual growth over the past few years. Be sure to compare and contrast this to the growth of the industry that they’re in to better understand their performance against that of their rivals.
As we appear to be set for another landmark year for initial public offerings, it’s vital that investors work to find impartial information on the companies that are set to go public. With increased hype surrounding this form of investment, there’s a risk that some business news platforms could become too bullish over the future of certain companies going public. Always conduct your own research to avoid being stung in the brave new post-pandemic marketplace.
