A burger, fries and some shares on the side
In just a few minutes and with a few clicks of its app, UK customers of food-delivery firm Deliveroo could apply for shares – starting at a £250 ($353) commitment and going up in increments to a maximum of £1,000 – ahead of its March listing in London.
The IPO was ultimately the worst in London history, with the share price falling as much as 31 percent, but among the many headlines the company generated was the fact that it had allocated £50 mn worth of shares for its existing customers ahead of the listing. In the end, around 70,000 retail investors bought stock via the app, with the company telling those signing up that, if oversubscribed, shares would go to its most loyal customers first.
Though it was otherwise a ‘traditional’ IPO, Deliveroo’s customer sale is just one example of something of a shake-up in the IPO world. This summer a new reality TV show, Going Public, will follow four small-cap companies as they prepare to list on Nasdaq, with viewers and fans able to buy into the IPOs as they watch along.
Then there’s the news that Robinhood, the commission-free investment app with 13 mn users (according to TechCrunch), is rumored to be planning a new platform to allow users to buy into IPOs – including Robinhood's own.
All this is seeking to capitalize on the surging interest the market has seen from retail shareholders since the start of the Covid-19 pandemic. According to an April survey by Charles Schwab, 15 percent of US stock market investors invested for the first time ever in 2020. For these new market entrants, the biggest surprise in their first year of investing was apparently the idea of doing so for the long term.
‘The new issue market, and the IPO market in particular, have evolved significantly over the last 12 months,’ says David Brown, senior managing director and head of equity capital markets advisory at EY. ‘Both banks and investors have been willing to test new processes and structures, and as these deals have largely traded well, everyone has been rewarded and market participants remain open to evolving the standard IPO process.’
He mentions direct listings – used by Spotify and Palantir in recent years – as well as special purpose acquisition companies. The success of these deals shows 'the market can adopt different paths to the same end,’ notes Brown.
But better access to buying at the IPO price doesn’t necessarily translate to a better deal for retail shareholders. How many of the 70,000 Deliveroo customers buying shares in a few clicks are likely to have done any research? Or even understood that while institutions would be able to trade as soon as the company listed, retail investors would have to wait a week before they could buy or sell their stock?
Brown says companies should be aware of what comes with a larger retail holding, too.
‘One thing to note, however, is that heavier retail participation often equates to more significant trading volatility – which should be considered and expected,’ he says.
