What is an Initial Public Offering (IPO)?
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IPOs have traditionally only been available to institutional investors, high-net-worth individuals or brokers with connections to the issuer. Here at OnMarket we are using our platform and over 140 years combined experience in capital markets to democratise access to the best IPOs hitting the ASX boards.
But what is an IPO? This article explores some of the key features of an IPO and sheds some light on the reasons why companies choose to go public.
What is an Initial Public Offering?
An IPO occurs when a company issues new shares to the public via a stock exchange. Once these shares are issued, investors can trade the shares on a stock exchange such as the ASX. The ASX is a secondary market because shares that have already been issued are traded between investors.
Every IPO in Australia requires a prospectus to be lodged with the ASIC and issued to prospective investors. A prospectus is a legal document which contains details of the offer, an overview of the company, analysis of relevant industries, financial information and key risks. If you are deciding whether to invest in an IPO, the prospectus is an important document which will help you make an informed investment decision.
What is the price of an IPO?
You may be wondering - how do the investment banks and brokers determine the price of an IPO?
A bookbuild is the process where a company evaluates investor demand when raising capital, with the intention of achieving the best price in the sale of shares. During a bookbuild process for an IPO, the lead manager of an IPO typically sets a price range for the company’s securities and asks investors to then indicate how many shares they are willing to buy at certain prices within this range. The lead manager would then use its discretion to select the best price based on this investor demand.
Why does a company IPO?
Companies choose to go public for a number of reasons, which may depend on the specific capital needs of the business, the demands of the shareholders and the broader investment and macroeconomic climate.
Reason #1: To raise capital
At its heart, an IPO is another way a company can raise capital to fund its operations and growth strategy. Being a listed company also makes future capital raising a lot easier, because it is cheaper, quicker, and more flexible to issue new shares via a stock exchange than through a private round.
Reason #2: To improve liquidity
Liquidity refers to the ability of an investor to buy and sell shares in a company. In an unlisted company, shares can only be traded on a certain “liquidity event” such as a trade sale, buyback or IPO. Investors in unlisted companies are thus unable to buy and sell shares when they like.
However, when a company lists through an IPO, the shares of the company can be traded much more frequently via the stock exchange. This allows a greater number of institutional and retail investors to buy shares in the company, attracting increased investor interest and broadening the company’s shareholder base.
Reason #3: To provide an exit for early investors
Typically, a company which undertakes an IPO is at mature stage, with an established market presence, growing or stable revenues and a clear medium-term growth strategy. Prior to the IPO, the company would have received external investment from a number of Venture Capital or Angel investors in private rounds. An IPO allows these early-stage investors to sell their shares to new investors and realise a return on their investment.
Reason #4: To increase market awareness
An IPO is an important stage in a company’s lifecycle and can attract significant media attention. This increases the profile of the company and raises awareness of their products and/or services across suppliers, customers and the broader public.
Source: Wilson, K. and F. Silva (2013), “Policies for Seed and Early-Stage Finance: Findings from the 2012 OECD Financing Questionnaire”, OECD Science, Technology and Industry Policy Papers, No. 9, OECD Publishing.
We don't like to talk about ourselves... but... let's talk about OnMarket IPOs
OnMarket provides investors with access to a diverse range of high-quality IPOs. In 2021 alone, we provided retail and sophisticated investors with access to over 30 IPOs raising a combined $536m throughout the year and contributing to just under 30% of the shareholder spread in these deals. We also provided our members with some outstanding performers, with Zoom2U Technologies (ASX: Z2U) shooting 115% on the first day of listing and Singular Health Group (ASX: SHG) returning 247.5% in only a month after listing.
To view OnMarket's live IPOs, or to inquire about raising with OnMarket, click here.
Investing in IPOs is not without its risks, so it's important that you seek independent financial advice and read the prospectus.