IPOs and follow-ons

What are IPOs and follow-ons and why should you invest in them?

With investment, your capital is at risk.

What are IPOs and follow-ons?

IPOs

An initial public offering (IPO) is the process through which a private company offers shares to the public for the first time and is often the first opportunity for individual investors to buy shares in the business.

Follow-ons

A follow-on is the offering of additional shares once a company has already completed its IPO and is publicly traded on an exchange.

Follow-ons are most frequently conducted by way of an accelerated bookbuild (ABB). This involves a bank seeking orders from investors over the course of a matter of hours or a day. Shares tend to be sold at a discount to the prevailing share price.

Why invest in IPOs and follow-ons?

IPOs

Early stage investment

You get the opportunity to invest at the early stage of a company’s lifecycle when the runway of growth is still very significant.

High growth potential

When a company goes public, it can use the money it raises to fund new product launches, acquire other companies, and grow into different geographies. Sales and profits may accelerate as a result.

Discounted pricing

To ensure demand for new shares, IPOs can sometimes be priced at a discount to their intrinsic value versus comparable companies.

Follow-ons

Avoid share dilution

This gives you the chance to maintain your proportionate holding, often at a discount to the market price.

Clear and fair pricing

Investors benefit from zero commission and no stamp duty when they buy shares in a follow-on.

Accelerated growth

The capital that a follow-on provides may result in a better outlook for the company, allowing it to reduce debt and lower financial risk, or accelerate growth through increased capital expenditure or acquisition.

The disadvantages of investing in IPOs

Price volatility
When the shares start to be publicly traded, prices are set by supply and demand. Shares could have been misplaced and could rise or fall. Volatility can be high, especially if the company performs differently to expectations at the time of the IPO.
Higher risk of loss
Despite extensive disclosure of information to the public, there is still a high degree of uncertainty as to whether a company’s management will perform and deliver their strategy. Prospective investors shoulder carefully consider the risk factors highlighted in the disclosure document published in connection with the IPO before investing.

Please bear in mind that IPOs can create volatile market conditions which can place you at greater risk of losing your money. The value of investments can fall as well as rise, and you may get back less than you invested.