How To Invest In An IPO – Forbes Advisor UK

Initial public offerings (IPOs) on the London Stock Exchange are back in the headlines. This is welcome news for a sector that has been languishing in the doldrums over the past year.

Raspberry Pi, the Cambridge-based, low-cost computing company, is planning to float on the premium segment of the London stock market this month in a listing ultimately valuing the company at around £540 million.

But it will be completely overshadowed if Shein, the China-founded online fashion company, confirms rumours that it too is planning a blockbuster £50 billion London IPO of its own.

Here’s a closer look at IPOs, including the potential benefits and risks for investors.

What is an IPO?

IPOs provide an opportunity for the public to buy when a company lists its shares on a stock exchange for the first time.

Plenty of examples exist where a successful IPO has delivered immediate share price gains for investors.

But it’s not always plain sailing. There are also many instances where an IPO has left shareholders nursing substantial losses, thanks to a plunging share price in public trading.

2021 was a bumper period for IPOs on the London Stock Exchange. But the testing market conditions of 2022 and 2023 meant that IPO activity fell off a cliff during that two-year period.

News of the Raspberry Pi deal and, potentially, the Shein announcement, has given renewed vigour to the sector this year, however, which has already seen the likes of MicroSalt, Air Astana, European Green Transition, Fuel Ventures VCT, and Helix Exploration come to market.

How does an IPO work?

An IPO is the process through which a privately-traded company first offers its shares to the public.

The newly-issued shares are listed on a stock exchange such as the London Stock Exchange, or the NASDAQ in the US. The process is often referred to as ‘going public’ or ‘floating’.

There are a number of reasons why a company might choose to carry out an IPO. For example, a flotation provides the opportunity for existing investors, including founders and employees, to sell a portion of their shares.

It also allows corporate backers, such as private equity firms, to cash out their investments.

Companies may also choose to float to raise additional capital for expansion and acquisitions, and/or to reduce debt. Companies boost their profile by ‘going public’ and can secure preferential terms on borrowing from lenders.

At the same time, public companies face more scrutiny than when they occupy the private sector, having to conform to additional regulations such as disclosure requirements and reporting of results.

Publicly-listed businesses also need shareholder approval for corporate activity, including the setting of executive pay, as well as proposed disposals or acquisitions.

IPOs are often keenly priced to ensure that the issue of shares is fully subscribed, and to reward investors with a rise in the share price on the first day of trading.

There is usually a ‘lock-up’ period of 90 to 180 days during which existing and large investors are prevented from selling their shares to provide support for the share price in the early days of trading.

Should you invest in an IPO?

Susannah Streeter, head of money and markets at Hargreaves Lansdown, says: “Investing in IPOs and individual companies isn’t right for everyone. It’s a higher-risk way to invest your money. When a company first lists on the stock market its share price can rise and fall quickly.

Danni Hewson of investing platform AJ Bell says: “IPOs generate headlines and excitement. They can also create an immediate ‘pop’ for investors, a quick jump in share price on day one, which is why there has been such a big push to get retail investors more access to this part of the market.”

But Ms Hewson warns that there are downsides to consider as well: “There’s a common theory that the pop is created because IPOs are priced at a discount to incentivise investors to put their money into companies with no track record as a listed business.

“There have been plenty of examples of ‘market darlings’ that morph into cautionary tales once the dust settles.”

Hargreaves Lansdown’s Ms Streeter says investors need to apply the same approach to investing in IPOs as they would to any of their investments: “The value of your investment depends on the fate of that company. If it fails, you risk losing your whole investment.

“Investors should make sure they understand the companies they’re investing in, the company specific risks, and make sure any businesses they own are held as part of a diversified portfolio.”

Assuming investors are comfortable with the answers to all those questions, and they’re happy with how that investment fits into their overall strategy, risk appetite and actual portfolio, then it’s an option worth considering.

How to buy shares in an IPO

Despite providing an opportunity for companies to widen their shareholder base and increase customer loyalty, IPOs pose a challenge to retail investors who want a piece of the flotation action.

When it comes to being invited to participate in IPOs, retail investors tend to be in the minority with larger institutional investors, such as corporate pension funds, further ahead in the queue for shares. As a result, retail investors can be limited to trading in a newly-listed company’s shares only once they have floated.

Private investors may be able to subscribe to some IPOs through investment trading platforms that offer the REX service (provided by brokerage firm Peel Hunt) or PrimaryBid (an external service that facilitates IPOs).

Calendars of upcoming IPOs can be found on both the London Stock Exchange as well as trading platforms, although these typically only extend a few weeks ahead.

What is happening with Raspberry Pi?

Raspberry Pi makes computer modules for industrial clients involved in the ‘Internet of Things’ sector, creating devices with sensors, processing ability, software and other technologies that connect and exchange date over the internet. The company sold 7.4 million units in 2023. Strategic shareholders include Sony and the chip designer, Arm.

Hargreaves Lansdown’s Susannah Streeter says: “The company has announced its intention to list on the premium segment of the Official List of the FCA and to trade on the Main Market of the London Stock Exchange. Shares will initially be marketed between £2.60 and £2.80 each, implying a valuation of up to £540 million.”

What is Shein?

Shein is an online fashion titan founded in China but is now headquartered in Singapore. The company is rumoured to be preparing to file a prospectus with the UK’s financial regulator, the Financial Conduct Authority, for approval ahead of a potential UK flotation.

If the move goes ahead, the company, which has been at the centre of controversy over its use of cotton from the Xinjiang region of China and other issues related to workers’ rights, would be catapulted into the top tier of UK publicly-listed businesses with a valuation in the region of £50 billion.

Shein initially targeted a flotation in New York, but the move was beset by political opposition resulting in a cool reception from US regulators.