Why you couldn’t buy Freelancer.com (and how to get your hands on the next hot float)

Co-founder of the Switzer Report
Print This Post A A A

The remarkable success of the Freelancer IPO (ASX Code FLN), which saw first day gains on Friday of 220%, led to that all too familiar question – “how do I get some of the action”? Like many “hot” floats, Freelancer only floated less than 10% of its shares — 30 million out of a total of 436 million shares – to what it described as the “general public”, or about 600 lucky shareholders.

Unfortunately, it turns out that the “public” is not very “general” – and arguably, a pretty big misrepresentation. The “private private” might be a better description.

So, who makes up the lucky few who get to participate – and how can you improve your chances?

The truisms

The first rule to understand with a float or an IPO is that unless it is a mega float, if somebody is offering it to you, you probably don’t want it. The more offers you get – the more you don’t want it. It is the classic demonstration of the ‘high school’ economics demand/supply equation.

As most IPOs have a fixed supply of shares at a fixed (or narrow range) of price(s), demand is the only variable. So, if demand isn’t being seen, the chances are that the suppliers will work harder to find the buyers. When the market finally gets to clear the stock (buyers meet sellers on the open market at the ASX), in all likelihood, it will trade at a discount to its issue price.

The second rule is that the actual promoter (read broker or underwriter) matters. The “best” brokers are involved with the best floats. They are the “best” because they have access to the best distribution, or the best research, or have the best track record or have the best record in “managing” the market after the stock lists. Smart company boards understand this – and conversely, the “best” brokers don’t want to sully their reputation and be involved in dog floats.

Of course, there are exceptions to both these axioms (in particular, the caveat around mega floats and household names) and, sometimes, the market gets it wrong. Also, how a stock fares on opening isn’t that important in the long run – the market will eventually recognise the true worth of any company.

The allocation

Typically, there are four groups of investors allocated stock in an IPO:

  • The Chairman’s list
  • Institutions
  • Broker retail clients
  • The general public

While most floats will find stock for the first two groups, the “general public” will only get an allocation if it is a mega float, or if the brokers are struggling to sell it to the institutions or their retail clients through the “broker firm” process. Hot floats, such as Freelancer, don’t even make it to the brokers’ retail clients. There is only one critical requirement that a new company needs to satisfy to list on the ASX – at least 500 shareholders – and that’s not hard to satisfy if the stock is hot.

The Chairman’s list is rarely identified separately in the offer document, as it comes out of the other allocations. Essentially, a small proportion of the stock is earmarked for key associates of the company. It might include non-executive directors and their families, close friends of the senior management team, key customers and suppliers, advisers and other individuals.

Usually, most companies will look for institutions to support the float. Institutions bring deep pockets, they are a ready source to tap for additional capital as the company grows, and they tend not to be as pesky as some retail shareholders can be. If more institutions support the float, it is likely that more brokers will publish research on the company, which, in turn, will lead to longer-term support from the institutional market.

Finally, retail clients may get a look in via the “broker firm” process (which depending on demand, may allow brokers to dole out the stock to their best clients), or if needed, the general public. In the larger floats where the issuer has some brand name recognition and the institutions set the price in a book-build, lead managers often want to create “demand tension” between the institutions and retail clients by adjusting the amount of stock available to each group. This may lead to a higher offer price, or help to ensure that there is a solid “post IPO” demand for the stock when it lists.

How to improve your chances

Obviously, we would all like to be on the Chairman’s list – so if you potentially qualify, don’t be backwards in asking. Failing this, open an account with one of the major brokers and start paying some brokerage with your friendly adviser.

You will need to weigh up the economics of dealing with an adviser compared to your current brokerage arrangements, and choose very carefully – access to IPOs by stockbroking firms, and even within a firm with different advisers, varies enormously. Put the hard word on upfront and ask him/her to tell you what floats they have been involved in.

If this approach doesn’t suit – don’t worry – the stock market is full of great investment opportunities. IPOs are just a tiny subset of these opportunities. And most importantly – don’t forget that if someone is offering you stock in an IPO, the chances are that you don’t really want it.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Also in the Switzer Super Report:

Also from this edition

View More Articles