2021 is shaping up to be the year of the IPO. Following the Covid-driven rush among businesses to adopt some form of digital transformation, businesses – particularly those based around the tech industry – have been scrambling to go public off the back of favourable financial results. Investing in initial public offerings has been something of a closed shop for some decades, but Robinhood may be about to change the investing landscape forever.
As Robinhood was ramping up preparations for its own IPO launch in the summer of 2021, the company announced its new IPO Access function.
In a statement on the company’s blog, Robinhood said: “Most IPO shares typically go to institutions or wealthier investors. With IPO Access, everyday investors at Robinhood will have the chance to get in at the IPO price.”
While the arrival of IPO Access hasn’t been widely greeted as a watershed moment for retail investing, it offers individual investors unprecedented access to initial public offerings where such investments are reserved only for institutional investors. Robinhood has also promised that all of its users will get an “equal shot at shares regardless of order size or account value.”
Cashing in on The IPO Boom
The arrival of IPO Access comes at the midway point in a record-breaking year for IPOs around the world. Thanks to a combination of favourable market conditions and an influx of new investment, global IPOs have raised huge volumes of money across 2021.
As the data above shows, over $160 billion was raised from global IPOs in Q1 of 2021 alone. For context, this sum is approximately three-times larger than that of 2018 and 2011 as the second and third largest opening quarters of the past decade.
Interest in IPOs has reached levels that haven’t been seen since the dotcom boom of at the turn of the century. However, if momentum continues to build, we may see records continue to be toppled as the year progresses.
The IPO boom is likely to have been driven by an influx of new retail investors into the industry as a direct result of the Covid-19 pandemic.
“What we have analyzed above actually looks like the consequence of the pandemic and the stimulation packages that followed. This created a pool of funds retail investors could start investing into stocks. As per Fidelity report, there were 26M retail accounts in 2020, i.e. up 17% compared to 2019, while the daily trading volume doubled,” explained Maxim Manturov, head of investment research at Freedom Finance Europe.
“People in the US traded about 90% more stocks than the week before they received their stimulation funds. Finally, a survey by Deutsche Bank, which included 430 retail investors, showed that the respondents were going to invest, on average, 37% of all their stimulation money into stocks. Goldman Sachs recently raised its expectations for stock demand by retail investors in 2021, from $100B to $350B.”
Usurping The Institutions
Large institutional investors and funds have historically always gotten the lion’s share of IPO allocations. This is because the investment banks that control the allocations generally find it easier to arrange when smaller volumes of recipients are capable of buying huge numbers of shares in one single go.
However, this process typically leaves retail investors with no choice but to buy into a company’s stocks after it’s started trading. If it’s a stock that has high potential, there’s a chance that a first-day pop would already be underway – meaning that the individual traders will lose out on significant profits. In fact, according to Dealogic, the average first day trading pop for US IPOs in 2020 was 36%.
Whilst the rollout of Robinhood’s IPO Access portal continues, another lending startup in Social Finance (SoFi) has also declared that it’s set to enable retail investors to buy into IPOs. It’s also worth noting that there is a range of online brokerages that offer some form of participation in initial public offerings, but, significantly, this tends to require a financial threshold of up to $500,000 in order to secure participation.
If Robinhood’s innovative platform finds more adoption among companies looking to list on stock markets across the US and beyond, it may represent a significant disruptive step forward for fintech and the battle to democratise finance for all participants.
As the data shows, Robinhood has outperformed its rivals in creating a platform for smaller more casual investors to set up accounts and trade confidently. The app’s bid to make IPOs accessible to these small scale retail investors is a key step towards leveraging greater inclusivity across the investing landscape.
Safeguarding Against Flippers
In a bid to secure the longevity of its IPO Access function, Robinhood has recently moved to place restrictions on users who sell the shares they buy at pre-IPO within 30 days of the company going public.
The move can pave the way for bans on initial public offering participation for 60 days. “We won’t prevent you from selling shares you get through the IPO Access program,” the company explained in a statement. “However, if you sell IPO shares within 30 days of the IPO, it’s considered ‘flipping’ and you’ll be restricted from participating in IPOs for 60 days.”
Although the move may mean that some investors will have to be bystanders for any strong first-day pops, encouraging more investors to hold their assets will mean that there will be a greater range of companies willing to share their IPO with Robinhood.
In their bid to democratise the future of finance, Robinhood looks set to offer investors a level of IPO participation that’s never before been possible. Their sustainable management of the function shows that the investing platform has built IPO Access to last.