30 years: Equity capital markets
James discusses what an IPO is, why firms issue them and the process of doing so.
James discusses what an IPO is, why firms issue them and the process of doing so.
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13 mins 19 secs
Many companies choose to “go public” through an Initial Public Offering (IPO) to access a wider pool of capital and to ensure shares are clearly valued and liquid. Although, some companies refrain from an IPO as it is time consuming and expensive, largely due to the ongoing disclosure requirements.
Key learning objectives:
Define an IPO
Explain why IPOs trade up on average
Learn the pros and cons of doing an IPO
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An Initial Public Offering or “IPO” is the term used for the first sale of shares sold by a company to the public. After an IPO, a company is referred to as a public company, as shares are sold to the public and are now listed on a regulated stock exchange. The shares sold in an IPO can be new shares issued by the company for the purposes of the IPO, or they can be existing shares held by private shareholders.
Given the huge variety of different companies, sectors and owners there is no one answer to this. However, the following are a number of key factors:
While there are different methods of accessing the market for the first time, the most common is done by hiring syndicates of investment banks that market the company’s IPO using an indicative range to collect buy orders from investors. The collection process is commonly referred to as ‘book-building’ which assesses demand. At the same time, senior management of the company typically go on a ‘roadshow’ to see investors.
At the end of this process, the company will review the book of demand with the lead banks and agree on the initial listing price. While it is uncommon for 100% of the shares to be sold, the London Stock Exchange’s main index requires at least 25% of the company to be available after an IPO.
One key reason is that IPOs are priced to compensate investors for the risk of putting orders in for a company that has never traded.
Other reasons include encouraging increased trading and ensuring a wide base of owners. Banks may push for low pricing to favour their largest institutional investors.
In 2018, there were over 1,300 IPOs globally, raising proceeds of just over $200 billion. While the absolute number was down from 2017, proceeds were up 5%, with several larger tech “unicorns” listing.
Regionally Asia remained the largest with 48% of the value, with the Americas at 29% and Europe 23%, broadly in line with recent precedents, although as recently as 2014 the Americas was the largest IPO market.
By sector, it is perhaps not surprising that the technology sector had the most IPOs, followed by Industrials and Healthcare. These three sectors together represented half of all IPOs.
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