How can you invest in IPOs as a hedge fund manager?

Going public offers private companies the opportunity to generate a large amount of capital, which can be put towards expanding the business. Hedge funds are reported to be the fastest growing IPO investors in the US IPO market, so how can hedge fund managers capitalise on the IPO trade?

How much money do I need to invest in an IPO?

The amount of money you need to invest in an initial public offering (IPO) will depend on your broker. Most brokerage firms require investors to meet specified qualifications before they can get involved with an IPO - this might be a minimum amount available in the brokerage account or a minimum number of previous transactions.

Is it good to invest in an IPO?

IPOs present a strong investment opportunity for hedge fund managers because they are equity investments, which means they have the potential to generate significant returns in the long run.

Many businesses launch their IPOs in the early stages of their development, which offers investors the opportunity to be amongst the first public owners of a company.

Likewise, some well-established, mature companies which had remained privately owned for a significant period of time, can decide to float and give hedge fund managers the chance to invest in companies with a proven track record of success and a positive outlook for the future.

However as with any investment, there is still a certain level of risk involved with investing in an IPO and it is vital to ensure there is an effective risk management strategy in place.

In some cases, IPOs do not perform as successfully as they are expected to, which can leave shareholders at a loss. Hedge fund managers should be wary of investing in overhyped IPOs and companies that are initially overvalued and subsequently fail to deliver on expectations.

With this in mind, well-known companies that launch IPOs at maturity can also still be bad investments. Just because an IPO is generating lots of positive attention and excitement does not guarantee that the investment will gain favourable returns.

Market conditions and the competitiveness of the environment can also influence the IPOs performance and thus impact the overall success of the investment.

What should hedge fund managers consider before investing in an IPO?

The US securities and Exchange Commission (SEC) advises any entity considering investing in an IPO to review the following sections of the IPO prospectus.

  • Prospectus summary: a brief overview of the information disclosed in the prospectus, such as the company’s strategy and plans for using the funds raised in the IPO.
  • Risk factors: a summary of any risks that the company’s management has identified as having the potential to significantly impact the business, operations or performance of the company.
  • Use of proceeds: an outline of how the company will allocate the capital it generates from the IPO.
  • Dividend policy: a description of the company’s dividend payment history and, if applicable, how it plans to pay dividends to its shareholders in the future.
  • Selected financial data: a disclosure of key financial information and other relevant data from the previous five years, presented in a format that highlights significant trends in the financial condition of the company and the results of its operations.
  • Management’s discussion and analysis: the management’s perspective on the company’s financial condition, changes in financial condition, and results of operations to help investors understand how and why the company’s financial results have changed over time.
  • Business: an overview of the company’s lines of business, its primary products and services, and the markets it caters to. This section will also describe the market’s competitive landscape and how the company remains competitive.
  • Management: profiles detailing biographical information on the company’s directors and executive officers.
  • Financial statements and notes: this section provides standardized financial reports on the company’s financial condition and performance, as well as the independent auditor’s opinion of the financial statements it has audited.

IPOs vs. SPACs

Here's a quick summary of the key differences between special purpose acquisition companies (SPACs) and IPOs:

Cost: SPACs have come with a standard 5.5% underwriting and completion fee, whereas with an IPO there is at least 5%-7% in additional fees for legal and audit requirements etc.

Timeline: SPACs can be completed in a much shorter timeframe than IPOs. SPAC mergers usuaally occur within 3 - 6 months whilst an IPO can take between 12 and 18 months.

Valuation: The valuation of a SPAC can be determined before it is listed whereas IPO valuation depends on the stock price and market conditions at the time it is listed.

Deal Terms: SPACs present a greater opportunity to negotiate more favourable terms for those involved than IPOs do, where there is no room for flexibility on terms

Management Support: With SPACs, there is access to sponsors with experience in mergers and acquisitions, but with IPOs companies usually have to seek advice from independent experienced professionals.

IPO Trading with IG

IG Prime is a trusted prime broker that allows investors to take a position pre-IPO, participate in the IPO and trade the stock when it is fully listed. Our partnership with PrimaryBid also enables smaller hedge funds and family offices to take positions in IPOs. Keep updated with the latest upcoming IPO reports or start trading with us today.

Date de publication: 2022-09-23T15:55:34+0100

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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