The IPO catch: Why the best deals are often the hardest to buy into

Picture two UK investors who bought SpaceX shares this summer.

The first applied in June and got them at the $135 initial public offering (IPO) price. The second missed out and bought at the end of the first day’s trading, at $160.95. By the end of October, in dollar terms, the first had roughly broken even. The second was about 16% down. Same company, same shares, one day’s trading apart.

Anthropic could be next. Its filing, published on 26 October, says the offering includes a public offer in the UK. Before you apply, it is worth knowing where the money in these deals is made, and who gets it.

Where is the money made in IPOs?

Jay Ritter, a finance professor at the University of Florida, has tracked US flotations since 1980, and his figures show the same gap between those two buyers, though a smaller one.

Take the biggest companies to float in that time: those with more than $1 billion of annual sales, adjusted for inflation. On average, their shares rose 9.8% on their first day of trading.

Anyone who bought at the end of that first day missed that gain. Over the next three years, the shares rose roughly in line with the US stock market, trailing it by about two percentage points on average. Smaller companies did far worse, falling 34 points behind it.

So for the biggest names, the gain has tended to arrive on day one and go to whoever got the offer price. After that, buyers got roughly the market’s return while carrying the risk of a single company.

That gives you the first thing to work out. If you are scaled back (given fewer shares than you asked for) and tempted to top up once trading starts, compare the price on your screen with the offer price. The gap is a premium paid to earlier buyers, and Ritter’s figures for big companies give no reason to expect it back as extra return.

Why do you get less of the good ones?

Shares at the offer price are now within reach, but they are rationed. SpaceX’s IPO was made available to UK investors under the FCA‘s new public offer platform rules, which let companies sell to private investors here without a UK prospectus. Demand came to almost $1 billion, so applications were filled in full only up to £2,013. Bigger ones were scaled back.

Jersey Mike’s, the US sandwich chain, used the same route for its New York flotation in July. Its limit was higher: applications were filled in full up to about £3,190. The shares closed their first day six% below the offer price, and were about a fifth below it at the end of October. So the deal you could have more of is the one that fell on its first day.

Economists call this the winner’s curse. Kevin Rock set out the mechanism in 1986. Better-informed investors pile into the attractive issues and stay away from the weak ones. Everyone else, including you, tends to be rationed in the good deals and filled in full in the bad ones. That is why, Rock argued, companies have to price new shares at a discount to keep ordinary investors applying.

Two deals prove nothing, but Rock’s idea has been tested. In Israel, where every applicant was scaled back by the same proportion and the allocations were published, researchers studied flotations in the early 1990s. Applicants were given more shares in the deals that turned out to be overpriced. The average flotation made an initial return of 12%, but ordinary applicants, allowing for what they actually received, earned a negative one.

Who’s next, and at what price?

Bloomberg has reported that Anthropic is working with RetailBook, another platform operator, to take UK orders through the usual investment platforms, and may set aside 15-20% of the shares for private investors worldwide. Neither is final, and no price has been set.

The price of the same business can move a long way. Starling’s founder, Anne Boden, has sold her last shares at a valuation of £1.7 billion, Sky News reported in October. That is less than half the £4 billion the bank was reportedly seeking last year. Monzo, Sky also reported, is talking to private equity firms about selling a stake after takeover talks with Brazil’s Nubank ended. Neither of these British neobank looks close to floating at present.

Shein shows why that matters. Reportedly valued at about $100 billion privately in 2022, the fast-fashion retailer listed in Hong Kong on 1 September at about a quarter of that price. Its public offer was 5.6 times subscribed, and only about half of applicants got shares. Those who did saw the price close its first day just below the offer and end October about a quarter lower. Rationing told them the deal was popular, not that it was good.

What should you check before applying?

• Decide the most you will put in before you apply. In the offers so far, each platform set its own minimum. As a rule of thumb, treat any allocation as a small, speculative holding.
• Apply only for an amount you would be happy to hold in full. In the deals other investors avoid, that is what you will get.
• Check your platform’s currency conversion charge, and whether the shares can sit in your ISA or SIPP.
• Know that an accepted application is binding. Check the offer’s terms, but usually you can withdraw only if significant new information comes out during the offer.
• Read the lock-up section of the prospectus, which says when insiders can sell. SpaceX releases its insiders in stages; Elon Musk’s own shares are locked up until 12 June 2027.

The verdict

In a mega-IPO, the advantage lies with whoever buys at the offer price, and the better the deal, the fewer shares you are likely to get. If you want a stake, keep it small and treat it as a bet.

Paying up on day one has, on average, bought the market’s return, minus a little, plus one company’s risk. A low-cost index fund buys the market’s return without it.