A Primer on IPO

Malaysia’s IPO Mania

As the nation grapples with the economic devastation from the latest surge of Covid-19 infections, trading volumes at the local bourse have reduced significantly amid the weakened market sentiment.

Retail investors have held on to their funds and unloading them into the spate of IPOs that have emerged, with over RM5 billion raised from IPOs thus far this year.

Indeed, Malaysia has seen a record number of new listings in the months of June and July 2021 in what is dubbed by the media as “IPO mania”, shifting the trend away from the rubber glove, pharmaceutical and penny stock plays that dominated in 2020.

Each new listing is attracting on average RM400 million per IPO in 2021 compared to the RM150 million average of 2020.

So, what are IPOs and why is it gaining such interest?

What is an IPO?

As its name suggests, Initial Public Offering or IPOs are the first time a company makes its shares available to the public. It is a regulated process of new stock issuance that opens up ownership of a private company to the investing public, trading equity for money.

IPOs are used as a way for companies to raise capital to fund the next stage of their growth and expansion. It is also a means by which its owners – which may currently consist of the founders, family and friends, early employees, and professional investors such as venture capitalists or angel investors – can cash out of the investment.

It is a huge step for a private company, one that is not undertaken lightly but only when a company has reached a level of maturity to undergo the rigours of regulations imposed by the stock exchange and scrutiny of the securities commission, as the actions of the owners and leaders of the company will now be held accountable to public shareholders.

The IPO Journey

Companies interested to go the route of IPO will need to underwrite their share issuance, which is often done through an investment bank; or multiple investment banks if the IPO offering is big or valuable enough.

Together with the company owners, the underwriter will determine the price of the IPO by assessing the value of the company, the number shares to be issued, and the percentage of ownership that will be made public.

Their intention to go public will be made known through the launch of a “Prospectus”, a legal document filed with the securities commission documenting the company’s business model, growth strategy, financial history, industry outlook and other risk factors that investors would want to know before deciding to participate in the IPO.

With the prospectus, the issuing company pitches its business plan to institutional investors and major funds, while the underwriter gauge the level of interest in the IPO, before deciding on the final price of the IPO stock offering.

The underwriter essentially funds the listing process, putting up the money to ‘buy’ the shares from company owners at the agreed price, before distributing them at the stock exchange for the public to purchase. They’ll also help the company file the IPO with the securities commission and get listed on a stock exchange.

Investor Interest

This process takes several months to a year, sometimes longer, and successful IPOs are celebrated with much fanfare, usually with a ceremonial ringing of the bell or striking of the gong to signal the start of trade of its shares on the stock market. Investors can now buy and trade shares of the company, and the share price will fluctuate based on the market demand.

The flurry of activity in the months leading up to the IPO, from the prospectus and roadshows to the launch event, helps increase visibility of the company. Coupled with the rigorous underwriting and filing processes, an IPO is considered a coming of age of sorts for companies – a rite of passage that signals to investors that the company is competitive in its niche and has passed the vetting process and is ready for the big leagues.

Against a depressed market, this makes IPOs an attractive investment option for those on the hunt for the next unicorn company to invest in.

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