Tags: Buy | New | Listings | Offer | Price | ipo | stock

Reuters Data: Buy New Listings at Offer Price

Thursday, 02 Jun 2011 12:56 PM

 

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Investors buying shares in newly listed companies need to get in at the offer price, as on average there are little gains to be made after the first day of trading, Thomson Reuters data showed.

Taking a punt on the biggest 100 initial public offerings (IPOs) globally each year for the last five years would have yielded an average return versus the market of 11.8 percent on first day of trading, according to the data.

While this outperformance then stays fairly steady — at 10.9 percent after the first week, 11.8 percent after a month and 9.9 percent six months after the market debut — the data shows almost all this gain comes on the first day.

The average performance drops below zero across each of the time periods when first-day returns are taken out.

"It is a delicate art," said a global head of equity capital markets at an international investment bank.

Quick Gain

Much of that art has to do with how the bankers divide the shares up between funds that plan to hold the stock for longer periods and hedge funds looking to make a quick gain on the first day of trading, market participants said.

"Increasingly, the stock in these IPOs doesn't get placed with people who would be long funds in the right geographies," said Catherine Stanley, UK fund manager at F&C Asset Management.

"They've gone to hedge fund managers, or a wide variety of different investors who are not long term holders in the shares. So they take the first day bounce and then sell it."

Aftermarket performance has been a source of contention this year, with investment bankers accused of mispricing several high-profile deals that have not had a smooth debut.

Shares in U.S. social networking company LinkedIn more than doubled on their first day of trading — a jump that prompted Facebook investor Peter Thiel to criticize Wall Street for undervaluing the company.

In contrast, those running commodities trader Glencore's London and Hong Kong float have faced claims the $10 billion offering was overpriced as its shares have struggled to peep above its offer price since last month's market debut.

Enamored with China

Aftermarket bounces have been more prevalent in China, the data showed, where IPOs have seen an average first day rise of 21.5 percent versus the wider market.

Asia has been a key driver of equity capital markets business, last year printing two $20 billion plus IPOs, and much of that activity has come from China, whose companies have accounted for 28 percent of IPO activity since 2007.

"There have been periods of time over last five years where the market has been absolutely enamored with Chinese growth," said the head of equity capital markets.

"That makes investors feel some incremental pressure to get involved and probably drives better aftermarket performance in a not dissimilar way to what we have seen with some of the internet IPOs in the past few months."

Despite a difficult year so far for European listings, with more than 15 deals pulled, globally the IPO market has had its busiest year to date since 2007, with $93 billion raised in the first five months of the year.

China and the U.S. have been the key drivers, together accounting for half of the activity in the year to date.

Although there have been some notable first day rises, particularly in the technology sector, such as LinkedIn's 109.4 percent jump and Chinese Internet firm Qihoo 360 Technology's 134.5 percent rise, overall this year IPOs have seen a below-average first day rise of 4.7 percent.

"The whole point of it is that they are supposed to attract you to market by putting it on at discount but that discount is ... not particularly apparent," said Charlie Morris, Head of Absolute Return at HSBC Global Asset Management in London.

© 2014 Thomson/Reuters. All rights reserved.

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