With shares tumbling in the first day of trading, the recent Robinhood (US:HOOD) initial public offering (IPO) could certainly have gone better. But other elements of the flotation may be remembered more kindly.
Notably, the company had planned to allocate between 20 and 35 per cent of its shares to its own customers, an unusually high amount. Robinhood is not alone: this year’s Deliveroo (ROO) IPO included a community offer for UK-based customers, with PensionBee Group (PBEE) and Soho House owner Membership Collective Group (US:MCG) taking similar action.
Cynics may dismiss such moves as gimmickry, but retail investors do appear to be getting better access to company fundraising efforts, having previously been excluded from a spate of emergency share placings in the teeth of the pandemic.
In a significant development, platform PrimaryBid has focused on facilitating a retail element of UK IPOs and share placings, with some positive initial results. As the chart below shows, the company has helped grant retail investors access to a number of share placings in the FTSE 100 and 250 so far. PrimaryBid has also been involved in nearly a fifth of 2020's main-market IPOs and roughly a quarter of those carried out this year so far.
Separately, Crowdcube, which allows investors to put money behind unlisted companies and proclaims a mission to “democratise investment” similar to that of Robinhood, recently announced its own plans to enable customers to take part in IPOs.
In from the cold?
Retail investors have often been excluded from fundraisings, partly because of the EU prospectus regime currently followed in the UK. While companies can raise funds equivalent to up to 20 per cent of their share capital without having to issue a prospectus, fundraising from retail investors on that basis is capped at €8m – something ShareSoc director Cliff Weight describes as “an anachronism”. Other potential burdens in the placing and IPO process can lead companies to turn to institutions.
This could change. HM Treasury is currently consulting on changes to the prospectus rules, with one aim to “facilitate wider participation in the ownership of public companies, and to remove the disincentives that currently exist for the issuance of securities to wide groups of investors – including retail investors”.
Separately Mike Coombes, PrimaryBid’s head of external affairs, notes that IPOs have grown more retail-friendly in part due to a number of “profile” brand-name flotations, although participation is not guaranteed. Others have agitated for improvement: the bosses at Hargreaves Lansdown (HL), interactive investor and AJ Bell (AJB) wrote an open letter in February demanding that retail investors have “as much right as any other institution to invest at IPO".
Placings have historically not been accessible to DIY investors and Coombes argues that this is the more egregious issue, given dilutive capital is raised at a discount that retail investors cannot enjoy. Results are still mixed here, especially in the FTSE 250, where established names such as Ascential (ASCL) and JD Wetherspoon (JDW) have raised substantial amounts without including retail investors.
There’s a catch
While the likes of Robinhood have made a point of including smaller investors, substantial retail participation can bring its own complications. Oliver Brown, whose MFM Primary Opportunities fund (GB0009606988) has a close focus on the investment opportunities presented by UK placings and IPOs, grows wary at the sight of a large retail presence in a company’s shareholder register.
“If I know a company has a big retail base that can lead to some slightly strange share price movements,” he explains. While not all smaller investors can be viewed as flighty or tactical, he points to cases where share prices have moved, in the absence of any news, on the back of retail activity. He believes chemicals specialist HeiQ (HEIQ) saw its shares ramped up in the weeks following a December IPO due to its observed status as a Covid play, and that Infrastrata (INFA) has seen its shares suffer due to retail sentiment.
Brown instead would like to see “other long-term high-quality investors”, including other fund managers, on a shareholder register, as a sign of quality. Some companies making big overtures to retail might be seen as struggling to raise funds elsewhere. In the case of Deliveroo, it was notable that several big investors appeared to shun the IPO.
