Before I go into the details of an IPO, let me ask the basics, “Have you heard the term IPO before?”.
What Is An IPO?
If you have been reading the stock market news or taking part in it, It would be a “Yes”. For those of you not familiar with the term, IPO means Initial Public Offering. Meaning the company shares are being sold to the public. IPOs are intending to raise fresh capital for the company to fund its growth ambitions. When the company IPO, the company will issue new shares.
Pre IPO, companies raises money via Private Equity or borrow money from family or friends. They may also be getting the funds from Angel investors and so on. Once the company grows beyond a certain point, they have to raise fresh capital by issuing new shares. IPO is the option to do so.
Are IPO’s Risky?
Decades ago, companies only IPOed once the business model has proven to be working. It was then using the money to scale up operations and expand overseas. In the late ’90s and early 2000s companies started going public even without any profits. Investors in the past were only willing to put their money to companies with track records only.
Times have changed, investors investment objectives changed and also economies changed. People are willing to buy shares of companies that are growing very fast. Especially companies that grow revenues and grow in market share. Investors see the potential in those companies and expect them to be worth more in future. Some of these companies grow and make huge money and become profitable. While some can get to this stage faster, others may take a lot of time.
Many companies don’t become successful as they envisioned. Companies will change their leadership teams and also change business models. Like any investment, investing in companies IPO will have risk elements too. This is because anything can happen in the stock market as well as in the corporate society. Always, only invest in companies you can understand and have high conviction in.
Will All Companies IPOs Succeed?
The simple answer to this question is “No”. Not all companies will succeed. Companies like pets.com are examples of failed IPOs from the .com era. In the current information era, we can research companies. It wasn’t the case in the past, where computers were not popular before mobile devices. Even in the current days, other challenges determine the fate of IPO companies. A recent experience from the US stock market can be the case of DIDI Chuxing Technology Co. About 6 months ago, this company got listed in the US. In the New York Stock Exchange, this is the company known as the UBER in china. It was the largest ride-hailing platform in china.
Soon after the DIDI IPO, the Chinese government asked the company to take down its apps from the app stores. This resulted in the company share price sliding and currently trades > 60% loss in share price. The government also forced this company to de-list from the US and asked to list in china/Hongkong. This was citing concerns over national security on the grounds of data collection.
If you think that these are all only problems with China and its regulatory risk, let me remind you of some US stocks. Companies like ENRON and WorldCom are some of the examples from the US too. If you spend some time reading about the IPO failures from the place you live, there can be many examples too.
Alternatives To IPO
There are alternatives to IPO. Companies need not go on the traditional IPO route to engage an investment bank to become public. Below are some alternatives to IPO.
DPO
DPO stands for Direct Public Offering, it is also called Direct listing. This is when the company list’s some of the held shares in the stock market and lets the public buy them. These are great for those startup’s whose early investors and staff paid in shares. Once the shares are free to list in exchange, individuals can sell them to the market and make some money.
A recent history of a DPO can be Palantir Technologies, PLTR which is listed on NYSE. DPO’s are rare and in recent times there were only 25 DPO’s when there were more than 1000 IPO’s happened.
SPAC
It’s a trendy topic in town nowadays, many companies choose this route to get listed in the stock market. SPAC stands for Special Purpose Acquisition Company. As the name sounds, these are of special purpose. This is done by a shell company that pools money from investors and gets listed in the exchanges. These shell companies do not have any operations. This company will find a suitable company to merge with. Once the merger is completed, it will become a meaningful full company.
Companies often choose this due to the complexity of the IPO documentation. Somehow it seems that the SPAC route requires less paperwork. Countries like Singapore are looking to introduce SPACs to Singapore. This is to invite companies to list in the Singapore exchange.
Personal Thoughts On IPO Other Listings
Looking back at the time of this writing, I can recall that I have invested in all these types. I would like to share my experience so that you will get some ideas on some first-hand experience. I have written other posts on the basics of investing and the steps I take before starting investing.
With IPO
When the Chinese company DIDI was listed in the US market. I was happy to get some of the hot IPO for myself. Without having the Chinese government’s action in hindsight, I buy small positions too. Only to realize that the stock price has dropped ever since and is losing most of its value.
I liked the concept of Ride-hailing. Since the company has 90% of the market share of the world’s second-largest economy. Why not.. right?. The company plans to offer a one-to-one exchange of Hongkong shares when it gets listed in Hong Kong.
While there are many possibilities and we are still unclear of how it’s going to plan out. I’m also waiting for a 60% loss of value of what I have already paid for it. This is one of the main reasons why I always prefer to have a position sizing. Also suggesting diversification to protect from single big losses.
With SPAC
I have only invested in one company using SPACs. This was for the company Grab. A ride-hailing + many other features in a super app. They have many businesses like delivery, e-commerce. Even a digital bank license in Singapore. This company is popular in south-east Asia and operates in 400+ cities.
This is one of my high conviction stocks. As I’m a user of the company’s services. I trust that the company management is capable of driving the company out of the covid crisis. It’s a long term play as the company is expecting to make profits in the coming years.
After GRAB announced that it will go for the listing, they mentioned the partner’s name. Altimeter Corp and I grabbed some shares too. While it was a risky play, I got it closer to the floor value of the share. Meaning that the shares will not go less than 10$ a share. The merger was completed in early December and the stock price is down about 40%. This is because of the raising covid concerns and growth stock sell-off. Combined with the doubts on the interest rate increase and inflation. I’m bullish on this company and willing to ride through the volatility for the many years to come.
With Direct Listings (DPO)
As I mentioned Palantir technologies earlier, I had invested in this company too. This is because I like the business of this company and the management team. Palantir is a data and AI company. We know that data is the new oil and AI is the technology in demand. Palantir has been developing its platforms for the past 17 years and it has supreme products.
It may take some time for the company to grow. It will take other companies on the importance of a good platform for data. There will be huge tailwinds for PLTR in the coming future. In the short term, PLTR is down a lot from its all-time highs as the whole tech sell-off is happening at a high pace. It’s worth noting that bear markets last shorter as per history. Great companies will grow and become more profitable. All you need is the patience and holding power to tide over the short term price fluctuations.
Conclusion
It’s great you took the time to understand the differences between listings. You may use this knowledge next time you read the stock news to better understand the market and stocks. As I mention in all my posts, no one solution fits all. Considering newer companies are riskier. You should exercise caution and think about whether it fits your needs and style. Always get professional help when necessary. Feel free to subscribe to get updated if new posts.