Ernst & Young1 has reported a 7% drop worldwide in the number of companies which float on the stock exchange since the start of 2024. However, the average size of these newly listed companies has increased by 26% compared to last year.
Indeed, in a market that has been very buoyant in recent weeks and with high-profile names that are real Wall Street blockbusters, such as online trading platform Reddit and the US presidential candidate's new social network Truth Social, which has now merged with TMTG, investors have been on the lookout for what are perceived to be easy, spectacular gains.
After the post-Covid SPAC2 phenomenon, could IPOs be the new trend for 2024?
As a reminder, an IPO is an acronym for Initial Public Offering. It marks a company's transition from private status to a public listing, when its newly issued shares are first traded on a stock exchange.
Companies raise fresh capital for business development and to strengthen their reputation and credibility.
In return, the company is subject to several transparency and communication requirements (quarterly financial reports) and increased pressure from its new shareholders on its short and medium-term performance and profitability, both in terms of revenues and profits.
Are IPOs a sign of a stock market bubble?
Reddit, trading platform which has not yet become profitable, listed at USD 34 and saw its share price soar by almost 50% in the first session. Truth Social merged with TMTG, bringing the market value of Donald Trump's media company to nearly $7 billion. However, these deals are not limited to the financial centre of New York.
Swiss skincare specialist Galderma floated at CHF 61 per share, almost 15% below the upper limit of the expected range of issue price of CHF 49 to 53. According to l'Agefi3, this represents a European record, with a CHF 2.3 billion valuation equivalent to the total volume of the ten IPOs on the Swiss stock exchange last year.
These figures are cause for questions and perhaps even concerns.
According to Bloomberg data, between 1999 and 2000, at the height of the Internet bubble, more than 1,300 companies floated on the stock market, raising around $170 billion in capital. Between 2020 and 2021, more than 1,500 companies went public, raising more than $500 billion in capital.
However, the latest figures should be considered in a market environment that has been largely inactive since 2022 due to rising interest rates and falling stock markets. Indeed, these recent market performances remain well below the record levels seen in the early days of IPOs during the dot-com bubble.
As an investor, how do you get involved in an IPO?
Unless you are a close friend of an investment banker or can put a few million on the table to secure access, it is difficult for a retail client to get an allocation of new shares, especially if the IPO is oversubscribed.
Being a client of a "book runner" bank, i.e. a financial institution that is the lead underwriter or one involved in structuring a new equity issue, can make things easier with a request for a pre-IPO allocation based on a theoretically announced price.
Alternatively, you can place your instruction before the market opens on the IPO flotation day with a price limit price to avoid the order being executed at no matter what cost. Alternatively, simply be patient and wait for the buying frenzy to die down, for the share price to stabilise, for financial analysts to publish their earnings estimates and so for a market consensus price to emerge.
In future months, the exit of private equity shareholders can also be expected, after the legal restriction of a “lock-up” period. A lock-up period is when a company's insiders, investors, founders, and employees are prevented from selling or buying back their shares after an initial public offering (IPO).
Investment isn’t speculation. Buying the right stock at the right price as part of a portfolio construction, seeking advice and surrounding yourself with experts, from the investment advisor to the trading desk, remain the master words of all investments, IPO or otherwise.
1. EY Global IPO Trends Q1 2024 | EY - Global
2. SPAC: « Special Purpose Acquisition Company », a financial engineering mechanism that involves merging with a target company.
Author
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Nadège Guimard, who holds a degree in Business and Corporate Finance from Toulouse Business School, began her career at Newedge in Paris before moving to Luxembourg to work in investment fund structuring. She later worked at Candriam Asset Management before becoming head of discretionary management at Banque Internationale in Luxembourg, and then specializing in investment funds in Geneva at Julius Baer. With nearly a decade of experience in multi-asset investment consulting, she joined the Investment Consulting team at Piguet Galland & Cie, valuing client interaction and continuous learning.
