The public is missing from IPOs, It's time that changed.

Tuesday, 27th September 2016 14:33 - by Tom Britton

Hotel Chocolat, the innovator of the chocolate bond, which allowed customers to invest in the business in return for repayment in chocolate, recently IPO’d and all the institutions involved in the float have since seen their investment increase by more than 30% – and the stock price is still rising.

One would think the company pioneering this highly alternative form of corporate finance would attract a lot of retail investors, those who received chocolate instead of profits, into their stock market flotation. But, one would be wrong. Hotel Chocolat and, if the figures from 2015 maintain, over 80% of companies that IPO or execute a share placement do so with no retail tranche.

Private investors have traditionally been bit-part players in the broader IPO landscape. Consistently excluded from new issues, often regarded as too short-term, unpredictable and complicated to include in the process, the perception was that (outside of government privatisations) the city didn’t really like private investors.

However, attitudes – and technology – are changing. It’s no longer complicated to add a retail component to a share offer, and the significant levels of demand generated for new issues that have been offered to (increasingly sophisticated) private investors have highlighted the potential of this part of the market.

Marcus Stuttard, Head of AIM and UK Primary Markets at London Stock Exchange Group, agrees that inviting more retail participation in public opportunities is exactly what’s needed: ‘One of our key mantras is that we need to diversify the sources of financing for businesses, not just in the UK but across Europe.’

So, the appetite is there on the company side – yet still there is a markedly small number of private investors taking part. Why exactly is this?

Earlier this year we conducted a survey of retail investors to gauge their views of public market investing, and one result rang loud and clear: people want to invest in IPOs, but they have no idea how to do it.

This is an issue nurtured by convenience: institutional investors already have an association with nomads and brokers, so companies present opportunities to them on a platter rather than seeking capital further afield. The result is institutional investors snapping up shares and discounts – much like in Hotel Chocolat’s already profitable float – while private investors register too late that the IPO is even taking place.

How do we solve this? What is needed is a consistent flow of information keeping private investors abreast of public market developments and opportunities, and a secure channel through which individuals can invest on the same terms and discounts as big institutions. 

This is precisely what we’re trying to establish. As a member of the London Stock Exchange and a designated intermediary, we already release weekly news updates on the state of the public markets on our own site (you can subscribe to receive these updates here), and we hope to establish another reliable news outlet on capital markets right here on the LSE blog.

But first, let’s make sure you have a confident footing. Over the next three posts I will outline the basics of what you need to know before seeking out IPOs and Placings, from who the different players are to the legals involved to how shares are allocated.

In a post-Brexit world where interest rates are being slashed, when the stock market is volatile, the potential of investing in IPOs and alternatives should be on the mind of every investor. Stay tuned for next week’s follow-up as we explore the IPO in more detail.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.