Global IPO activity has increased significantly, especially in 2020-2021, hitting higher levels than during most of the previous 20 years. An investment in an IPO has the potential to deliver attractive returns. However, launching an IPO and trading IPO securities differs from ordinary stock trading, and an investor needs to understand the additional risks and rules associated with IPO investments.
Most of us are familiar with the term IPO (Initial Public Offering), which means that a private company decides to sell its stock to the public on a recognized stock exchange, and therefore is going to change its status from private to public.
There are numerous reasons why companies choose to go public with an IPO. It could be because they want to raise capital to fund projects, pay off debts, gain more publicity and higher standing with private investors or banks, or create liquidity by selling all or a portion of their private shares as part of the IPO.
Not every company can pursue an IPO. The costs and burdens of having an IPO on the prestigious and liquid US exchanges such as, for example, NYSE are significantly higher than in any other country and legal requirements are also quite rigorous. Unless a company’s valuation after an IPO could reach $250 million, it is not a worthwhile undertaking for a company to engage in an IPO there.
Now we will take a closer look at the process that the stock issuer must follow to have an IPO. This process usually can take from six months up to a year and involves the flowing steps:
- choosing an IPO underwriter,
- conducting due diligence;
- submission of IPO regulatory filings; taking on an IPO
- roadshow;
- IPO price-setting;
- placing the IPO on the stock exchange;
- applying after-market stabilization;
- transition to market competition.
We will consider every step involved separately but will start with emphasizing that choosing a reputable investment bank or a pool of banks to underwrite their IPO Is crucial to the successful structuring and conducting of the company’s IPO. Most major IPOs do not just involve one investment bank. Some of the largest IPOs have been assisted by teams of multiple investment banks that have a reputation within the industry.
The lead underwriter or a syndicate of underwriters will be in charge of all the important activities associated with the IPO campaign: helping the company with preparing the registration statement, conducting the due diligence, assisting the company in determining the initial security price, furnishing the initial draft of the underwriting agreement and lock-up agreements, buying the securities from the issuing company, and then distributing these securities by selling them on behalf of the company.
The success of an IPO relies heavily on choosing the right underwriter. Companies will look at the investment bank(s)’ reputation, quality of research, and industry expertise when selecting investment banks to go on an IPO with.
Stay tuned with Wolfline Capital, and in our next article on the capital markets, we will touch upon more particulars of IPO underwriting.