2021 has seen record number of IPOs. More than 40 companies have successfully raised more than $ 9.7 billion of capital via IPOs in 2021. Post pandemic bull run also aided this activity. Investors, particularly retail investors have supported the IPO frenzy. Most stocks have listed at a good premiums, further adding to increased retail interest. Retail investors mostly look for listing gains, which most IPOs have successfully delivered until recently when the PAYTM IPO tanked nearly 27 % from the offer price eroding shareholder wealth.

While we cannot accurately explain all market events, many of which are driven by herd mentality & investor sentiments, we can as investors study at least some basic facts of the company prior to putting our money into its IPO. Let’s learn 5 basic things to study prior to investing in an IPO.

1.Understand the company business

Firstly things first, KNOW YOUR COMPANY. Legendary investor, Warren Buffett, always propagates “Invest within your circle of competence.” Always invest in those companies whose products or services you understand. It is not expected that you understand all the technicalities of that industry but it is always good to know what business the company is involved in, the products or services it offers, its competitive advantage, any existing legal or regulatory challenges surrounding these products/services.

2.Study the past performance of the company

3.Know your promoter/management background

As investors we must know the promoter background, their qualifications etc. Recognized names add a certain credibility to the issue and therefore, add a premium to the price as well. A higher percentage of shares held by institutional investors and banks could be a positive sign, indicating their confidence in the company.

4.Future Plans

We must understand what the company intends to do with the money that it will raise from the IPO. Is it only to repay debt or for expansion purpose. Again, the prospectus will provide information on what is the purpose of raising capital thru IPO. If the purpose is just paying off debts, then its best avoided. A healthy sign is usually paying off existing debt as well using for future expansion. However, most of the funds raised through IPOs are used to offer an exit to existing PE or VC funds or existing shareholders and promoters.

5.Technical Factors

It is also worthwhile to study some technical factors like the size of the IPO (generally larger the size, lower the listing premium), anchor subscriptions (which banks, FIs & mutual funds have invested – healthy share amongst them lends more credibility), overall subscriptions (higher the demand, higher the expected premium as well as one can expect healthy buying even post listing)

So Folks, next time don’t forget to do your homework before you put your hard earned money in an IPO.

To know more about upcoming IPOs and other investing avenues drop us a mail at info@investopert.com