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Ordinary investors miss out on ‘public’ offers that are anything but

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Investing in a company when it issues shares to the public for the first time can provide a great opportunity to grow your wealth. The company is usually at the beginning of its corporate journey and can have years of high growth ahead of it. 

But while this process of issuing shares on the stock market is called an Initial Public Offering (IPO), more often than not there is little about it that is ‘public’. This is because ordinary investors like you and me can be unfairly excluded from buying shares. 

Companies nearly always offer first dibs to huge institutional investors who have more financial muscle and buy large chunks of shares. Ordinary investors are invariably only given a look in once the company has listed and shares can be bought and sold on the secondary market. 

Locked out: Ordinary investors can be unfairly excluded from buying shares when companies float on the stock exchange

Locked out: Ordinary investors can be unfairly excluded from buying shares when companies float on the stock exchange

The Treasury has woken up to the fact that this system is unfair. It is currently consulting on changes to the IPO process that would make it easier for ordinary – often referred to as retail – investors to get invited to the IPO party. 

Writing in the consultation, which is due to close this Friday, Economic Secretary to the Treasury John Glen says the Government wants to facilitate wider participation in the ownership of public companies. 

‘Doing so will allow a broader cross-section of society to benefit from their growth,’ he explains. ‘It will also enable companies themselves to access a broader investor base, as well as improve market functioning overall by increasing the liquidity of markets.’ 

How investors can benefit from an IPO 

IPO activity in the UK is booming. It went quiet through the first months of the pandemic, but has since bounced back magnificently. Darktrace, Deliveroo, Dr Martens, Moonpig and PensionBee are among the companies that have floated on the London stock market this year. 

In the first quarter of this year, IPO activity reached levels not seen since 2007, with £5.6 billion raised. 

Oxford Nanopore, which provides rapid Covid-19 tests to the NHS, has just announced plans to float – and there are rumours of flotations from companies including Brewdog, Gousto, Oaknorth, PureGym and Starling Bank. 

However, of the IPOs, so far only Deliveroo and PensionBee have allowed ordinary investors to take part from the word go. 

Of course, not all IPOs lead to bumper returns for investors. But research from investment analyst Stockopedia suggests that shares tend to rise after the initial float – reaching a high around six months later. 

It also found that over the past five years, smaller companies that went public tend to have the greatest success rate, alongside those in the health and technology sectors. 

One of the more recent IPO successes was software development firm Dev Clever, which has seen its share price rise by more than 300 per cent to 33p since its listing in January 2019. 

Why are ordinary investors left out? 

So why does it matter whether ordinary investors can invest from day one or are forced to wait at the back of the queue? After all, share prices can fall as well as rise in the first few days of trading. 

First, it’s a matter of fairness. At the moment, ordinary investors are treated as second class, having to wait until their bigger cousins have had their fill before getting a look in. 

Dan Lane, senior analyst at investment platform Freetrade, says: ‘Quite rightly, retail investors are asking why there’s one rule for them – the people often using and promoting the products and services behind these stocks – and another for the big banks and investment funds swooping in, seeing through the IPO and making the biggest returns. 

Why should every-day investors be left with the dregs after institutions have had their fun and made their money by the time retail investors can finally buy?’ 

Excluding ordinary investors can also hinder capital markets. 

Richard Wilson is chief executive of wealth platform Interactive Investor, which last week won a shareholder engagement award from investment trust trade body the Association of Investment Companies. 

He believes that cutting out ordinary investors can hurt entrepreneurship. ‘We’re disabling the economy by constraining the match between supply and demand,’ he says. ‘And we are frustrating the entrepreneurial process by restricting the flow of capital into businesses that should succeed.’ 

Allowing ordinary investors a look in can also offer advantages to the company that is listing – as well as its customers. 

For a start, ordinary investors are likely to be in it for the long haul and be loyal shareholders, unlike professional investors who may be more geared to trading to make a quick buck. 

Romi Savova is chief executive of pension provider PensionBee, which offered its customers the chance to invest when it floated on the London Stock Exchange in April. She says PensionBee has seen numerous benefits. 

‘Our IPO was such a momentous part of our journey that we wanted to make sure customers could participate,’ she says. ‘It’s one of many actions we’ve taken to bolster our long-term customer relationships.’ 

Savova adds that more than 9,000 customers participated in the IPO and they had been with PensionBee for a year and a half on average when they bought shares. 

She believes that being able to invest at an IPO is another way people can assert power over the companies they interact with. She adds: ‘Individuals are becoming more interested and engaged with corporate society around them. People do a lot to signal their values – through the food they eat, where they shop and what they teach their children.

‘Being an active shareholder is another way you can channel your views on the impact you have on the world around you. It allows you to become engaged in corporate society – by being a shareholder you get a vote.’

Rules set in Brussels are getting in the way 

Mike Coombes is head of external affairs at PrimaryBid, a technology platform that helps ordinary investors to access IPOs. He believes that the barriers are ‘down to archaic rules as much as anything rational’. 

He says: The system has not changed in several decades. There are rules previously imposed by Europe that no longer make sense. The Treasury and industry bodies are forging a path away from the rules set in Brussels.’

One of the rules up for change requires firms to publish a prospectus if they raise more than €8million (£6.8million) by issuing new shares. But if ordinary investors are excluded, they can raise considerably more – up to 20 per cent of their share capital – without having to issue a prospectus. 

This may not seem like a particular hindrance until you see what issuing such a prospectus entails. 

They are often great volumes, with regulatory requirements so severe that there are jail terms for those who get it wrong. Prospectuses may be designed to offer transparency to investors about what they’re buying, but in reality they are full of legalese and generally impenetrable. 

Coombes adds that the management teams of companies set to list are also not incentivised to include retail investors. He says: ‘Advisers tell them not to bother, and since they are unlikely to have managed an IPO before, the management team know no better and steer clear.’ 

So what needs to be done to end unfairness? 

The Treasury is currently consulting on an overhaul of the prospectus process, which it believes could help to level the playing field between institutional and ordinary investors. 

While Interactive Investor’s Wilson says such a move would help reduce the friction to involving ordinary investors, it isn’t the solution.

He says: ‘We could spend a lot of time sweating over simplifying prospectuses, only to find that, lo and behold, after two years of rowing hard to fix it, the result has no beneficial impact. 

‘Companies still won’t open to retail investors because they are advised by banks that are incentivised not to see the money go to retail investors. 

‘The vast majority of chief executives going to market have either done zero or one IPO before and rely on the experts for their advice.

‘If retail is not part of the pitch, it will not be included.’ 

Wilson believes that a quota system would mean that companies were obliged to involve ordinary investors when they float. 

Coombes agrees, and points out that in France a mandatory ten per cent allocation is made to ordinary investors, while in Singapore it is 25 per cent. 

Savova suggests companies that list should be forced to ‘comply or explain’ – either open up their offering to ordinary investors or else explain why they are not doing so. 

That way, the default position shifts from opting in to opting out. 

Shackled: While the process of issuing shares on the stock market is called an Initial Public Offering, more often than not there is little about it that is 'public'

Shackled: While the process of issuing shares on the stock market is called an Initial Public Offering, more often than not there is little about it that is ‘public’

For now, investors are still missing out 

The City’s regulator, the Financial Conduct Authority, warned last week that there are nearly 8.6million savers currently holding more than £10,000 in cash that could be put to better use if it was invested. It aims to cut this figure. 

At the same time, it warned that too many people are investing in higher-risk products that are not aligned with their financial needs. 

Yet investors are being cut out of one of the most regulated investment environments in the world – the London Stock Exchange. 

Public equities are the most democratic asset class,’ says Coombes. ‘They are highly regulated and offer all investors equal and full disclosure. 

‘Investors get bombarded with adverts for everything except stocks and shares.’ 

Not all shares issued at IPO will be appropriate for ordinary investors – some may be too niche, even for sophisticated investors. 

And investors who buy shares need to ensure they have a balanced portfolio so they are not overexposed to the fortunes of a small number of companies.

However, if we want to encourage share ownership among ordinary investors, it’s time to level up the playing field. 

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