Top of The Pops: How Retail Investors Can Benefit From New Levels of IPO Access

The IPO market has never been as open and as active as it is today. The Covid-19 pandemic, growth of SPAC companies, and a recent influx of retail investors have paved the way for some extremely favourable conditions for businesses looking to go public - and thanks to innovations among fintech apps, retail investors are finally allowed to join the initial public offering party. 

The recent launch of retail brokerage, Robinhood’s IPO Access portal has helped to put more users in touch with IPOs than ever before, and the company utilised the platform to release its own initial public offering for retail investors. 

(Image: CB Insights) 

As the data above shows, Robinhood amassed an average of 20 million monthly active users over January and February of 2021, with significantly large volumes of new arrivals emerging over the course of 2020 in the wake of the Covid-19 pandemic. 

In launching its IPO, Robinhood took the unusual step of opening 25% of its shares up to the platform’s 22.5 million funded retail accounts. In the buildup to going public, as many as 301,573 users decided to buy the company’s IPO, representing 1.3% of the platform’s active users. 

(Image: PwC)

As we can see from the table above, 2021 is set to be another golden year for initial public offerings, and in H1 alone, the total number of offerings in the US has surpassed that of 2020 in its entirety. 

Unprecedented Access for Retail Investors

Until recently, IPOs had been something of an exclusive club for institutional investors, with individual traders watching on from the sidelines. 

As Maxim Manturov, head of investment research at Freedom Finance Europe notes, “It is institutional investors who usually get the far greater share of an IPO: historically, institutional investors get around 90% of all shares, with only around 10% left for retail trades. This is where allocation comes from: when the demand is high, the broker will have to reduce order amounts so as to at least partially fill all of them. The allocation ratio, meanwhile, depends on the investor trading activity and volume.” 

Why are institutional investors so heavily favoured during the IPO process? Well, accessibility is one of the leading options. Big buyers have traditionally been easier to find than, say, identifying 1,000 retail investors to purchase the same volume of shares as one institution. 

The scarcity of IPO shares means that many institutions typically have to make do with far lower allocations of shares than even they would like. "Especially with a smaller IPO, nobody really gets 100% of their fill. In fact, no one gets more than 10% of their interest in the allocation," according to Kathleen Shelton Smith, principal at Renaissance Capital.

Fundamentally, institutional investors have deeper pockets and are capable of purchasing high volumes of shares in one fell swoop, making it far easier to allocate IPO shares to them and leaving many retail investors in the lurch in the process. 

However, this may all be about to change as retail investors become increasingly keen on buying the debuts of their favourite companies. Deliveroo has let its customers and the general public invest in its IPO through a dedicated platform called PrimaryBid. Although users were locked into their positions to safeguard the stock from early volatility, the performance of the investment appears to have paid off: following a slow start to trading, Deliveroo’s share price is up a respectable 20% on its market opening. 

“Enabling retail investors to get access to the IPO at the same stage as institutional investors is vital to the market,” stated Darren Westlake, CEO of Crowdcube, who invested £1,000 ($1,390) into Deliveroo via PrimaryBid.

PrimaryBid’s collaboration with Deliveroo shows that IPO Access isn’t the only portal available for the public to get involved with initial public offerings, and many modern online brokerages have begun adopting some form of IPO participation for users - opening the door to many of the benefits that institutional investors have enjoyed for decades. 

Top of the Pops 

Participating in an initial public offering enables investors to catch the first day ‘pops’ that some stocks can experience in price when shares appear to have been undervalued by underwriters. 

(Image: Financial Times)

According to Financial Times data, mid-2020 to early-2021 saw a wide range of first day pops take place among US IPOs where the price of newly listed stocks outperformed their pricing ranges. In the case of the second half of 2020, more than 50 IPOs performed above expectations upon arriving onto the market - generating a first day boost to the pockets of early buyers. 

Although this trend has become less frequent throughout 2021, it still shows that early arrivals can experience some healthy accumulation that may not exist by the time the stock goes public. 

Although we may still have a long way to go before the IPO landscape offers parity between institutional access and retail investor access to stocks, the arrival of fintechs that open up the possibility of IPO investment to retail must be regarded as a giant leap in the right direction in terms of achieving a truly egalitarian financial market. 

While we’re currently in the midst of an IPO boom, the ramifications of initial public offering access for all will be far reaching in the years to come - paving the way for everyone to benefit from the possibility of fast appreciating stocks by climbing on board at the same time.