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New Issues and IPOs Explained

A new issue or an IPO (Initial Public Offering) is a method of bringing a company to the market, or an issue of additional shares.

What are New Issues and IPOs?

 
A new issue or an IPO is simply the sale of additional shares or the first sale of shares in a company. There are many reasons why companies offer shares to the public, including to raise new capital, widen their shareholder base, gain a stock market quote for liquidity or to raise their public profile.
 
However, it is not always possible for retail investors to participate in new issues or IPOs. The EU Prospectus Directive dictates that in order to offer shares to the public, the company must issue a prospectus approved by the Financial Conduct Authority (FCA). This can be costly and, as a result, some companies choose not to issue a prospectus and offer shares to professional investors and institutions only.

Benefits

  • There's no liability for Stamp Duty when purchasing bonds and shares in an IPO.
  • IPOs can be priced under the anticipated market value as judged by the issuer and can offer a good return over a short period. However, it is also possible the shares may fall in value when they become available on the stock market.
  • Bonds are usually ISA and SIPP eligible, offering the opportunity to receive Gross Interest with no further Tax Liability. Tax treatment depends on the specific circumstances of each individual and may be subject to change in the future.
  • Following issue, retail bonds become available on the stock market just like ordinary shares, and the Order book for Retail Bonds (ORB) offers transparency for private investors.
  • High demand may lead to new bond issues being oversubscribed, which in turn is likely to see high demand in the market once the bonds are trading freely, resulting in the bond price being pushed upwards.
  • Many corporate bond issues pay higher interest rates than the high-street banks and building societies; however, they remain exposed to interest rate and inflation risk in addition to other potential risks which will be outlined in the issuer documents.

Risks/Considerations

  • Investments can fall in value and you may lose some or all of the amount you have invested. With retail bonds, the promised payment of income and return of capital could be in jeopardy in the event that the parent company has problems meeting its financial obligations.
  • Retail bonds have less liquidity when trading if the company raises only a low amount of capital.
  • Retail bonds are expected to be redeemed at the end of their term at par, but over the life of a bond the market price will fluctuate, moving closer to par as the maturity day approaches.
  • In the case of bonds, if these are not index-linked, if the rate of inflation rises, the value of the money you get back in real terms will be lower.
  • Most new issues and IPOs have a short window with an application period of two weeks or less and can be closed early, scaled back or withdrawn depending on demand.
  • If the interest rate rises, bonds and gilts will see a fall in their capital value and may begin to look less attractive. Should holders then decide to sell, prices may fall as a result. The same may apply to equities whose dividends may become less attractive, potentially causing holders to seek alternative investments.
  • When purchasing bonds, there is no protection from the Financial Services Compensation Scheme (FSCS).
  • New issues do not always come to market at a premium.

Interested in a New Issue or IPO?

Existing Redmayne Bentley clients can register their interest in selected New Issues and IPOs through their local office or investment manager; however, please note that participation is subject to eligibility requirements set by the issuer. We may not be able to offer participation in all offers, and any final share allocation will be determined by the issuer.

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