The current IPO craze has turned the primary market into a lottery, particularly for retail investors. The chances of getting an allotment in the target IPO are slim. Those who do get allotment end up with a fraction of the shares applied for. Since January 2018, IPOs witnessing greater than 50% gains after listing have seen average retail subscription of more than 27 times. IPOs fetching between 15%-50% gains have recorded nearly 13 times subscription on average. So many individuals would have likely missed out on these stellar gains.
Further, even if you get allotment, odds of hitting the jackpot are poor. Finding success in IPOs is akin to betting on the toss of the coin. While several new listings have created phenomenal wealth, many have turned out to be duds. Since January 2018, 44% of new listings have clocked more than 15% annualised return. Twenty two small-caps to list on the exchanges in this period have turned into mid-caps and another four small-caps have grown to become large-caps. At the same time, several new listings have fizzled out. Nearly 31% of companies that have listed between January 2018 till October are currently in the red. Five mid-caps have turned into small-caps after debuting on the bourses in 2018. Four small-caps have been suspended. Clearly, investors need to be very picky when investing in IPOs.
For investors feeling left out or unsure of which IPOs to target, the Edelweiss Recently Listed IPO Fund offers an alternate path. This one-of-its-kind thematic fund was launched in 2018 as a closed-end fund, Edelweiss Maiden Opportunities – Series 1. It was converted into an open-ended avatar on completion of its tenure in June this year. As the name suggests, its sole mandate is to invest in companies that go public through IPOs. The fund cherry picks 30-40 of the best ideas from 100 recently listed and upcoming IPOs. Its top picks currently include Amber Enterprises, Sona BLW Precision Forgings, Gland Pharma, and Insurance.
Very few IPOs are investment worthy
Oversubscription keeps many retail investors out
Experts believe this vehicle offers a better way to participate in IPOs. Amol Joshi, Founder, PlanRupee Investment Services, argues, “The lure of quick gains tempts investors to put money in any IPO, which is a recipe for disaster. It is better to let a mutual fund do the due diligence and weed out the junk.” Santosh Joseph, Founder and Managing Partner, Germinate Investor Services, adds investors stand a much better chance of getting exposure to a new listing via a mutual fund vehicle. “A fund house is in a more advantageous position to get allotment through the IPO’s institutional quota or anchor book subscription. Even if it misses out, it can buy the shares at an appropriate time after listing.”
Timing the exit is another aspect investors grapple with when investing in IPOs on their own. Most tend to exit immediately after listing, missing out on possible future gains. Impatient investors often sell out if the company takes time to deliver on expected growth. “A lot of money can be made even post listing as earnings momentum for newer businesses can continue for a long time,” says Bharat Lahoti, Fund Manager, Edelweiss AMC. A longer holding period is needed to fully capture these opportunities. A professionally managed fund is better placed to do that. Besides, the fund’s portfolio is likely to have very low overlap with any existing diversified equity fund you may own. Traditional flexi-cap funds on an average have less than 10% exposure to newer listings.
What to watch out for
The fund has a strong performance track record. It has fetched 36.7% annualised returns over the past three years, compared to the S&P BSE500 TRI return of 21.85%. Yet, given the nature of IPO market itself, investors should take this performance with a pinch of salt. Be mindful of the risks that tag along with IPOs. The fund features a distinct tilt towards the mid-and small-cap basket, observes Joshi. Many of these companies have not been tested across business and economic cycles. Some newer tech-driven firms have not yet clocked profits. This gives the fund a distinct risk profile compared to traditional diversified equity funds. Those keen on a select few IPOs can skip this route as investors don’t have a say on IPO selection in the fund.
Investors looking to tap quality IPOs in foreign markets may also find a convenient way soon. Motilal Oswal AMC has filed for a new fund—Motilal Oswal S&P US IPO & Spinoff ETF. This will allow investors to bet on newer companies in US markets. Experts say international exposure should preferably be in the form of diversified funds rather thematic offerings.
