Success, failure and the great IPO robbery

interactive investor comments on Stockopedia research on performance of IPOs.

• 55% of investors invest in IPOs for the medium to long-term, ii and Stockopedia joint research finds
• But Stockopedia’s research suggests that while investors maintain a decent chance of success of picking an IPO winner over short-term time frames, after one year, the probability inverts

There are few events in the stock market that get investors as excited as a hotly anticipated initial public offering (IPO). But, more often than not, the general public have not been invited to join the float.

So, it is illuminating that new research published tomorrow by Stockopedia, the online investment research platform, suggests that over the past five years, 89% of IPOs have opened higher than their issue price. Stockopedia studied 258 UK IPOs over the last five years (excluding investment trusts), and looked at their medium-term track records, too.

Daylight robbery

Richard Wilson, CEO, interactive investor, says: “The saying goes that a fair exchange is no robbery. Unfortunately, there’s not much fairness when it comes to IPOs - it’s rare that the general public are offered the opportunity to get involved. The City institutions have tended to receive preferential treatment, leaving the rest of us to pay significantly more for the stock once the company floats. With 89% of IPOs opening higher than their issue price, according to Stockopedia, it effectively amounts to daylight robbery.”

Lee Wild, Head of Equity Strategy, interactive investor says: “This research shows that the best time to be involved in the typical IPO stock is before it begins trading on the stock market. Of course, the professional investors will argue that they put significant sums of money at stake, and that opening IPOs to a wider audience could have negative consequences for the float. However, the current process is clearly unfair and puts the retail investor at a clear disadvantage. Companies, their brokers and well-paid advisers should do the right thing and level the playing field. There’s talk of change, but talk is cheap - we won’t stop campaigning on this issue until we see change.”

Ed Croft, CEO of Stockopedia, says: “When participating in IPOs, investors really need to keep their eyes open and understand what they are being sold. Our research shows that IPOs are often structured in a way that benefits existing and institutional shareholders - with evidence of large cap over-pricing and first day price pops for deal insiders. Post IPO excitement can push prices higher in the short term, but the odds of longer-term outperformance are surprisingly low. Our research shows that focusing on better-quality, reasonably valued IPOs may have a significant bearing on performance.”

The DIY investor view

IPOs are no guarantee of success – far from it, and retail investor experiences have been mixed.

Joint interactive investor and Stockopedia research among 1,200 ii website visitors between 2 to 6 July 2021 found that more than half of respondents (58%) said that their IPO investments had performed as expected.

But nearly a quarter (24%) said their investment had performed worse than expected, while (19%) said it had performed better than expected. Attitudes to the inherent risk of investing at IPO were mixed – 49% considered investing at IPO moderately risky, and 48% considered it high risk.

Deliveroo (LSE:ROO), which was offered to retail investors at float, is a cautionary tale. Keelan Cooper, author of Stockopedia’s IPO survival guide, comments: “In the immediate aftermath of floating, Deliveroo was named the worst IPO in London’s history by a plethora of mainstream news outlets. The episode served as a reminder of how volatile and uncertain IPOs can be, and why investors would be wise to remain wary of over-publicised large-cap IPOs.”

Poor success rates over the longer term

Stockopedia’s research suggests that Investors maintain a decent chance of success of picking an IPO winner over short-term time frames up to six months. However, after one year, the probability inverts and there is a much higher chance of underperformance if investors hold on for too long.

So, it’s interesting that ii and Stockopedia found that among the interactive investor research base, 33% of respondents said they had (or would) invest at IPO for long-term growth, 23% said they would invest for the medium term, while 16% were out to make a quick profit.

Stockopedia’s research also suggested that small and micro-caps had a greater chance of outperformance over nearly all time frames over the last five years, while the health, tech and financials sectors also tended to offer more promising returns.

Notes to editors

About Stockopedia

Stockopedia helps individual investors beat the stock market by providing stock rankings, screening tools, portfolio analytics and premium editorial. The service takes an evidence-based approach to investing, and uses the principles of factor investing and behavioural finance to help investors make better decisions. Stockopedia is rated Excellent on Trustpilot and was named Best Research Service and Best Investment Tools Provider at the 2021 UK Investment Magazine awards.