If you’re interested in investing, or follow any type of stock market news, you’ve probably heard the term “IPO” mentioned more than a few times. So what is an IPO, and why does it tend to generate such a buzz in the world of investing? Read on for all of this and more in our guide to understanding IPOs.
What is IPO?
An initial public offering (more commonly referred to as an “IPO”) refers to the process of a private corporation offering shares to the public on a stock market for the first time. Colloquially this process is sometimes referred to as “going public” as once a company goes through an IPO their shares may be bought by any investor on the stock market for which the company is listed. In Australia the stock market is called the Australian Stock Exchange (ASX), but stocks can also be listed on the New York Stock Exchange, the London Stock Exchange, the Hong Kong, or the Shanghai Stock Exchange, to name a few.
Why do companies do IPOs?
The issuing of public shares to new investors allows a company to raise capital– generally a very significant amount, with some large companies raising upwards of 20 billion USD. The growth of a corporation from a private to a public company is an important transitional moment for the company itself, for public investors, company employees, and for the private investors to fully realise their gains from being the first investors in the company.
Before a company is permitted to list as a publicly listed entity however, there are rigorous audit and compliance checks that must be completed. The company must prove to the regulator that they are fit and proper, able to provide value to their prospective new shareholders.
So, what is the process for a company to go from private to publicly traded on the stock exchange? For this example, we’ll use the ASX process.
In order to list on the stock exchange, and raise equity capital through having an IPO a company must first prepare something called a “prospectus”, and lodge it with the Australian Securities and Investments Commission (ASIC). ASIC is a key regulator in the financial sector in Australia, and has the power to approve or to block an IPO from occurring. The prospectus is a key document in the process of a company going public, as it is one of the first major documents regarding company financials, sustainability, risk management, and other important information to be released somewhat publicly. In short: the company prospectus is required to contain all of the relevant information investors would require to make an informed decision before investing in the company.
The next step of the process, once the company has provided a sufficient prospectus and gotten the nod from the regulators, is for the company to decide to whom they intend to offer their shares to. Some companies may opt to allocate a portion of their shares issued to existing company customers, institutional investors, or to the general public. If you are entitled to apply for shares in the company, you are able to do so by completing the application form that is included in the prospectus, or via your broker.
Once all share applications are received, the company and its team of advisers will confirm the share allocations. This basically means that the company will confirm if you are able, or not able, to purchase the shares that you applied for. If an IPO is ‘oversubscribed’ (meaning that the company has received more applications for more shares than it has to offer investors) then applications may be “scaled back”. Scaling back shares means that you may ultimately receive fewer shares than you originally applied for, or perhaps even none at all- although the latter is not a common occurrence.
Once all the share allocations have been finalised and the required application money has been received by the company, the new shares are ready to go public. The new shares are then listed on the selected share market, which down under is the ASX. This is the IPO- the initial offering of shares to the public.
Once the company is listed, their shares can be traded as per normal, with fluctuating share prices depending on the supply and demand for the shares, as well as the evolving market conditions.
Significant Recent IPOs
Despite the grim economic outlook brought on by a season of bushfires, and COVID19 a total of 11 companies hit the ASX in 2020. A few generated a significant amount of buzz and capital.
Popular online beauty retailer Adore Beauty was listed on the ASX on October 23rd, 2020. The retailer was one of the most anticipated IPOs of the year, due to the surging popularity of its products across the country and year on year profit increases from product turnover, retained customer groups, and some smart acquisitions. Adore Beauty raised a total of $269.5 million from its IPO in October.
Aussie Broadband held their IPO on October 16th, 2020. The IPO was so anticipated that it was oversubscribed for the $40million in shares that it had to sell to the public.
Special mention: AirBnb
Although not listed on the ASX, AirBnb’s IPO gets an honourable mention, due to the sheer amount of capital it raised during its IPO- despite listing in the thick of the pandemic. The company listed on December 9th, 2020- and raised a total of $3.5billion USD with their IPO with shares sold at $68. The following morning, once the stock exchange opened, their share price shot up to $165 per share.
So, a company has had their IPO- what’s next? Well, a company can sometimes opt to offer a second round of shares to their investors…
IPO Secondary Offerings
Sometimes companies can host a second round of public share offerings. This can be motivated by a number of reasons however it is primarily done in order to generate additional capital for significant changes or upgrades that the company plans to undergo. There are two main types of secondary offerings- a Rights Issue, or a Placement.
A Rights Issue is where a company seeks to raise additional capital by offering new shares to their existing shareholders. The existing company shareholders are offered additional shares in the company on a predetermined basis, which is generally a discount for the public market price. Participation in Rights Issue(s) is optional for company shareholders.
A recent example of an ASX company that went through a Rights Issue is Sydney Airport, raising capital to combat their failing income due to COVID19.
A Placement is similar to a Rights Issue in that it is the issuing of new shares to raise equity, however it is more targeted- the company selects a number of key investors to which they offer the new shares. The company will generally target more institutional investors like fund managers for Placements. Placements, like Rights Issues, are generally offered at a discounted price.
Should you invest in an IPO?
Participating in an IPO can be a riskier investment than buying shares in an already-publicly traded company. This is for a number of reasons, however the most prominent is that the company does not have a history of share price reliability (as in – will the share price drop once you’ve purchased the stock?), nor a history of capital growth or paying out dividends to their share-holders. It is important to always consider the risk vs the rewards when considering purchasing stock in an IPO, and best to consult a financial advisor or stockbroker to get a professional opinion.
It is important to always consider the risk vs the rewards when considering purchasing stock in an IPO, and best to consult a financial advisor or stockbroker to get a professional opinion.
Interested in how to invest in IPOs? Speak to us!
We hope you found this article informative. The team at Pursue Wealth are on hand to answer any questions you have about the IPO process, investments, or this article itself! Whether you are in the position to be looking into investing in IPOs, or just starting your investment journey- our team is always happy to have a chat! Book in for a ‘Quick Chat’ with our dedicated team here, and we’ll see how we can help you work towards your financial goals!