Virgin Money is the latest firm to lock private investors out of its IPO. Why do so many do this?
Last week Virgin Money got investors excited by announcing its intention to float its shares on the main market of the London Stock Exchange.
Virgin Money intends to raise at least £150 million by selling shares to investors, to help grow its UK bank, which offers everything from mortgages and credit cards to investments and insurance products. As a 'challenger bank' with a recognisable brand, there's no doubt many private investors would like to jump on board Virgin Money's bandwagon.
So why are they excluded from the chance to get on board at the first time of asking?
Private shareholders not wanted
Unfortunately, Virgin Money's IPO is far from the first share flotation to exclude small investors. Indeed, it is far-too-common for companies listing on the London market to exclude private shareholders from their capital raising.
Here are four major IPOs due to take place before the end of 2014, all of which are open only to institutional investors, therefore locking out the likes of you and me, initially at least.
|
Company |
Business |
Potential market value |
|
Aldermore |
Bank |
£800 million |
|
British Car Auctions |
Car sales |
£1.2 billion |
|
Jimmy Choo |
Designer shoes |
£1 billion |
|
Virgin Money |
Bank |
£2 billion |
Despite having well-known brands, all four of these firms have decided to exclude private investors from their impending flotations. This is a great shame.
Now let's check the data covering previous IPOs during 2014 and over the past 12 months and how many included a retail offer (meaning private investors could join in at flotation).
|
Listings |
2014 to date |
Past 12 months |
|
Main market IPOs |
27 |
35 |
|
Retail offer |
2 |
5 |
|
% Retail offer |
7% |
14% |
|
% No retail offer |
93% |
86% |
Source: Hargreaves Lansdown
As you can see, in 2014 so far, only two out of 27 London listings included a retail offer to private shareholders. In other words, more than 90% of IPOs in 2014 excluded small investors. Over the past 12 months, a mere five out of 35 flotations included private shareholders, meaning they were excluded from 86% of IPOs.
So when it comes to raising capital via the stock market, the vast majority of listing companies deliberately choose to exclude the man in the street.
Why turn away private investors?
When delving deeper into this subject, one finds a pattern of old-fashioned market practices and habits that really have no place in the modern age.
Here are four traditional reasons why corporate advisers – such as investment banks, accountants and lawyers – strongly encourage their clients to keep small shareholders out of the loop.
1. To keep investment banks' clients happy
Investment banks (such as Goldman Sachs, Morgan Stanley and JP Morgan) have one core goal: to make as much money for their shareholders as they can. To maximise their peak earnings, they must keep their corporate clients happy and active.
So when it comes to IPOs, investment bankers want to maximise their fees and minimise their costs. Unsurprisingly they are keen to keep their most lucrative IPOs exclusively for their buy-side clients (pension funds, insurance companies and investment managers), and that means excluding private investors.
2. To keep the first-day 'pop'
Generally speaking, companies and their advisers price their IPOs so as to give new shareholders a first-day premium (or 'pop'). In highly popular flotations, this early uplift can be upwards of 100% of the list price. Obviously, investment banks prefer to reward their key clients and their own trading desks with this first-day pop, rather than sharing it with a horde of small investors.
3. To keep costs down
When it comes to raising capital in equity markets through flotations, private companies want to minimise their costs. One way to do this is to keep their shareholder registers manageable and concentrated by recruiting only institutional investors. After all, it's much easier to manage and communicate with 100 institutional shareholders than with 100,000 small investors.
4. To reduce paperwork
In the old days listing a company on the London market set loose a tsunami of paper. When communicating with private investors, all important documents (including initial prospectuses) had to be printed and mailed. Nowadays, thanks to online and electronic communications, this wave of paper has been reduced to a trickle, but the practice continues.
Why cutting out private investors is a mistake
To me, it seems crazy that companies routinely and deliberately exclude private shareholders from their initial listings. After all, according to research by Hargreaves Lansdown, 40% of investors say their first investment was into an IPO. Similarly, in last year's biggest London IPO, Hargreaves Lansdown found that, for 28% of Royal Mail IPO investors, this was their first-ever stock market investment.
IPO retail offers are vital in order to encourage first-time investors to dip their toes into the stock market. Gathering an army of small shareholders also creates a host of disciples willing to sing a company's praises to potential customers. Therefore, it seems highly likely that excluding small shareholders from IPOs could also impact on a firm's future growth rates.
Remember though, if you are interested in buying shares in company flotations, then tread carefully. Do your research and read all flotation documents carefully, because not every business is worth investing in.
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