The key attractiveness of investing is IPOs is that academic research has revealed that IPOs are systemically underpriced over a long period of time.
In 2014, following on from the public’s concerns about the Royal Mail IPO, the UK Government appointed a high profile independent inquiry into IPO processes.
An Independent Review for the Secretary of State for Business, Innovation & Skills: "IPOs and Bookbuilding in Future HM Government Primary Share Disposals” found
"The term “underpricing” refers to the fact that the IPO offering price is on average set below the market-clearing price resulting in a share price increase on the first day of trading. Underpricing of shares in initial public offerings is a phenomenon that has been extensively documented. The academic literature has shown that it is not limited to specific periods or countries and seems to be pervasive across capital markets throughout the world."
The report presented information on average first-day returns for 52 different countries. It referred to a study of 1,562 Australian companies between 1976 and 2011 by Lee, Taylor & Walter, Roo, Pham and Ritter revealing an average first day return of 21.8%.
Over the last 10 years, when ASX listed companies have issued shares by way of placement, the value-weighted discount to the closing price immediate before the placement has been 9.6%.
However, there is no guarantee that the secondary market for the shares in an IPO, or a placement will be higher than the issue price. The trading price may fall below the issue price.
As IPOs have no record of prior trading prices, investors need to assess whether they believe that the IPO is fairly priced. Likewise, when a company undertakes a placement it often provides new information about its operations and the use of the new funds. Investors need to take this new information and the effect of having more shares on issue when assessing whether to bid for shares.
Now, OnMarket gives ordinary investors the opportunity to participate in IPOs and placements, and potentially earn the excess returns that have persisted over time.