How does a retail investor access stocks before listing?


Question from David Endean

This Caveat Emptor feature is a great new addition to Cuffelinks.

How does a small retail investor get access to new stocks before they are listed on the Stock Exchange. They invariably seem to be sold to the institutions before they are listed?


Response from Roger Montgomery

At the primary schools in Sydney, every kid gets a prize and nobody misses out. At birthday parties, pass the parcel no longer has a toy at the end with one winner taking all. Today pass the parcel has a prize under each layer and the ever-watchful parents all contribute to when the music stops so that every child wins.

This is not the real world and even fund managers feel it as acutely as you.

Those that pay the most brokerage to the underwriting broker or lead manager get first choice. Upon reflection that seems entirely reasonable. The investment bank is working for the company being listed, spun out or raising capital and the company wants to see the funds raised as efficiently as possible. It means that a few participate – those who are willing to take risk in size and with some time-limited information – but many do not.

That doesn’t mean however you will miss out as the factors that cause temporary disconnects between fundamentals and prices in the secondary market will also work on new companies after they list. As the spotlight of the IPO fades and the humdrum of running a business returns, investors can easily become impatient, pushing prices below their issue price or below an estimate of intrinsic value.

If your strategy is to buy high quality companies cheaply – that’s our approach – there will always be opportunities to profit even if you miss the new listing on the ground floor you may still be able to take advantage of the market’s bi-polar tendency and enter on level 1 or 2 …

Footnote: The ASX has promised a paper on its BookBuild feature in early 2014.

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