What is an IPO and why invest?

2020 is about to end, and despite the ups and downs resulting from the global pandemic and the subsequent crisis, there have been 403 IPOs on the US market this year alone. We are talking about 81.5% more than in the same period of 2019, in which 222 IPOs were recorded.

What are IPOs and what do they mean for companies and for investors?

IPO stands for Initial Public Offering. In fact you have to distinguish companies between the ones that are private, and thus you cannot go buy their shares whenever you want, and those that actually are listed on a market (like the Borsa Italiana, or the New York Stock Exchange) that act as an exchange to allow anyone to buy or sell single shares in a company. Oval is a private company, like many startups, but private companies can also be huge. Take for example Ferrero and Barilla, two well known Italian brands in the food industry, of which ownership remains in the families and thus it is impossible to make an investment.

Why do companies IPO?

When a company is first born, we call it a startup. In this period of time it needs money to grow and generally goes to business angels to get funded. When the startup grows, as it finds its market fit, it will look for funding through Venture Capital firms that give them capital to fuel fast growth hoping to achieve a return for their money in 5 to 7 years. As these startups are now larger firms with proven revenue track record, they can choose one of two paths. The first is to receive other financing from Private Equity firms, that like Venture Capital give money to private companies as the name suggests to help the continuous growth with both debt and equity financing. The second way is for a company to receive funds from the public market. This means they file a document that explains the whole company, and through investment banks file for an initial public offering. This means they will allow the public, normal people like you and me, to buy their shares.  

Did you know that 2020 is setting out to be a record year for IPOs?

Companies chose to file for an IPO when there is a favourable market. 2020 has proven to be one of most successful years for IPOs. In the US markets IPOs reached nearly record highs of the tech bubble in the year 2000, and we have not finished the year yet.

If you look at 2020 alone, it is impressive how the number of IPOs really started to pick up in Q3 when the economies of the world were re-opening post lockdowns.

It is not just the US market that has seen a boom, China also has seen 38bn dollars of IPOs offered by chip companies as the market strengthens its IT infrastructure internally. Also 2020 was supposed to be the year of the Ant Group IPO, which would have raised another 30bn dollars, a record amount, with a valuation of over 200 billion dollars. Today this is put on hold because of rifes between its largest shareholder Jack Ma, and the chinese president. Once it will be back on track it will be sure to set some records of its own.

Why invest in an IPO’d company?

A recently IPO’d company has just started its journey in the market. It will for sure have a few years of adaptation but it also means you get to have exposure to companies that have huge potential to continue growing. Even though companies from many industries file for an IPO, most of these companies are from the technology industry. According to data from Renaissance Capital, over the last five years the tech sector has accounted for 23% of total US IPOs and 34% of proceeds generated by US IPOs. If you believe in the trend towards digital and technology playing an always more important part of our lives then this is an interesting set of companies to watch and think about allocating capital to.

Why are IPOs important for companies and investors?

Once a company is listed, after the IPO, investors can buy even a small number of shares, starting with one. This means that a company can start to have investors that also reflect their users. For example, if you love Apple and are always the first in line to buy their new products, you may consider buying its shares and get exposed to the performance of the whole company. This creates a link between users and companies, making the first more engaged and the second more responsible.

As investors we look more closely at what companies do and how they behave. This is a form of governance, as if you choose to buy a stock it means you believe in the product, but also the company management, how its CEO and board manages, and its values. IPOs and public markets allow you to link your investment directly making the company responsible. If a company does something that its users do not like, they can choose, if they are also investors, to sell the shares. If enough people do this the value of the company will go down. This means companies that IPO will have to be more careful at what they do to avoid losing not only users but also shareholders.

Oval does not provide investment advice and individual investors should make their own decisions. Seek the advice of a financial consultant if you are not sure about your investment. Your capital is at risk and the value of investments can go up as well as down and you may receive back less than your original investment: you should not invest money that you can’t afford to lose.