Initial public offerings can be a little bit like politics: a decent outcome may be when everyone is only a little bit unhappy. The question is whether even that will be achievable for Robinhood Markets.
This week the app-first broker is on track to complete its long-awaited IPO, and it has said it might set aside as much as 35% of the offering for its customers. That is a historically large amount, and these kinds of debuts have long been sought after — but for conflicting reasons. Small investors believe they should be able to enjoy the same IPO “pop” on discounted offering shares that institutions and wealthy individuals get, while many companies believe they should be able to sell their shares as widely as possible in order to get the highest price possible.
In theory, Robinhood is uniquely positioned to thread this needle. If it priced the deal at a very high point, reflecting big demand from small investors who aren’t very price sensitive, that would showcase Robinhood as a platform for other issuers looking to raise maximum capital, making it potentially a bigger player in the IPO business. Yet that might risk generating only a small pop, or even a fizzle, for customers of its retail platform.
But if Robinhood was willing to risk leaving some money on the table, it could price the deal well below where retail demand would cover it, and leave plenty of room for the stock to jump in the aftermarket. That would showcase Robinhood’s potential to customers seeking out future IPOs and perhaps create a sense of sharing-the-wealth with its wide audience of small investors. But it might not endear Robinhood to its existing investors and other issuers and their backers.
Perhaps Robinhood and its bankers can find a happy medium. After all, some of an IPO’s pop is likely attributable to big institutions buying in the market after getting allocated only a portion of what they asked for in the deal. Leaving them wanting more might help the first-day gains. Then again, if institutions decide to try to sell their relatively small allocations, or if retail demand in the open market is muted because so many small investors already got stock, it might damp those gains. A “pop” of 10% or 20%, rather than the shares skyrocketing, might just make everyone feel like they got something.
Robinhood customers getting into the IPO might also consider what is best long-term for the business in which they will be both an owner and a customer stakeholder. Actually locking in gains from an IPO pop might be tricky for an investor, since post-listing stocks tend to be volatile. Meanwhile, Robinhood raising maximum cash would fuel its growth, lessen any fears about funding future volatility-induced liquidity needs as happened with “meme” stocks in January and could also open the door to more future IPO access.
And of course this is all assuming that the process goes smoothly. IPOs are pretty hard to price with pinpoint precision for a desired pop. And technology plays a role, too. Robinhood will be testing its ability to notify customers and distribute shares on a vast scale. The chaos of IPO day has even tripped up exchanges such as BATS, which had to postpone its own listing on its own market, and Nasdaq, which paid settlements related to tech problems during Facebook’s IPO. Robinhood already has had its issues with technology outages.
And even if all systems work flawlessly, there is the risk of confusing customers new to the IPO process. Randomly allocating shares might leave some customers unhappy about what they are offered. Just because a system is fair and explained clearly wouldn’t necessarily stop people from complaining.
“Democratising” its IPO may have risks, but this doesn’t mean Robinhood was wrong to try it. The rewards could be huge if it builds customer loyalty. Change is long overdue for the IPO process and many market participants will be excited to see Robinhood break the mold. But it is still a tightrope act, on a tall building, with a big audience. Some people watch those for more morbid reasons.
Write to Telis Demos at [email protected]
This article was published by Dow Jones Newswires