You may have been taken aback by the 300–500 fold oversubscription of the HNI part of certain IPOs over the last few months. The strength of IPO funding is what is causing this type of oversubscription. HNI investors may apply for loans from several banks and financing organisations to participate in IPOs. Due to the shares allocated in the IPO serving as security, the IPO funding industry is comparatively safe. The main issue, though, is whether investing in an IPO fund makes financial sense for the investor. After accounting for the interest expense associated with IPO financing, do investors profit from a new IPO today?
What Elements Will Make IPO Funding Successful For Investors?
Even though IPO funding may only last a short while, an investor's ability to profit from it depends on several variables. Nevertheless, the HNI group of IPO investors will find financing appealing for the following reasons:
- If the IPO price is more cautious than aggressive for financed IPOs, it will be simpler to turn a profit. On the other hand, when prices are set excessively aggressively, investors are left with very little money, mainly when finance expenses are considered.
- The profitability of a funded IPO is also dependent on the market conditions at the time of listing. You will find it challenging to cover your IPO price and the cost of fundraising if market conditions are poor.
- The bank's or financier's interest rate is also essential. Depending on how much risk is considered, the interest rate might vary from 9% annualised to 15% annualised. NBFCs often charge more than banks do, and rates could be higher if the financier anticipates lower levels of IPO oversubscription.
- The success of the financed IPO is significantly influenced by the listing price. Because of this, it is lucrative to leave a financed IPO as soon as the listing date is feasible to keep your financing costs to a minimum. Conversely, your interest expense will increase along with your breakeven point if you decide to hold out for a more extended period.
- The degree of oversubscription is the main predictor of the financed IPO's success among the numerous variables. For example, the oversubscription for the HNI category might increase by up to 300–5000 times in rare circumstances. As a result, your breakeven point will increase in proportion to the amount of HNI oversubscription, and you'll need a far better IPO listing to make a profit on the issue.
The bottom line is that there is a significant conflict between the interests of the financier and the borrower in a sponsored IPO. The financier will only be interested in funding the IPO in the event of significant oversubscription, but the investor would profit from a financed IPO if there is little oversubscription. The IPO fundraising industry functions somewhere in the middle of these two extremes.
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