Retail Investors Are Helping Small IPOs Defy This Market Turmoil

(Bloomberg) — Retail investors are piling into stock offerings, fueling a jump in new listings by micro-cap companies in the face of a banking crisis that is sidelining bigger deals. 

This month, 80% of the US deal flow is from initial public offerings that raised less than $50 million, according to data compiled by Bloomberg that excludes SPACs. And those offerings are attracting small investors, not the big institutional buyers. 

For example, at least 40% of the cash raised in Mangoceuticals Inc.’s Tuesday IPO came from retail buyers, according to chief executive officer Jacob Cohen, compared with larger listings where institutions typically buy at least 90% of the shares offered.

“It’s the largest pool of equity capital in the world,” said InvestorLink Capital Markets founder Matt Michel, whose firm helps banks secure retail buyers for stock sales. “To the extent you can bring that to bear on a transaction-by-transaction basis, you can be more positive about deals getting done.”

Mangoceuticals isn’t alone. At least four other small IPOs have priced since the collapse of Silicon Valley Bank on March 10, which sparked a rush from risk that sidelined larger stock sales including IPOs. 

The flow of small IPOs reaching the market has proved resilient even though the deals are no longer delivering massive trading pops seen last year, when listings from one bank averaged a 2,200% surge during their debut session. This year’s smaller IPOs average a 7.4% loss on their first day of trading, according to data compiled by Bloomberg.

It’s worth noting that the retail investors buying into many of these deals aren’t necessarily the same as those who day trade Reddit’s favorite meme stocks. In offerings from bulge-bracket underwriters, they tend to be high net-worth clients who have existing relationships with those banks. 

“I think it’s about the amount of sophistication,” said David James, a managing director at Coastal Bridge Advisors whose clients include corporate executives, business founders and wealthy families. “With everything that’s happened in the market over the last year, they’re hopeful they can get involved in relatively early public companies going out at reasonable valuations.”

By contrast, smaller deals could more often involve cold calls from syndicate desks to prospective buyers from all walks of life. 

While bigger deals have been sidelined recently by the banking crisis, that wasn’t the case earlier in the year. At least 65 IPOs and secondary offerings raising $100 million or more have reached the market in 2023, according to data compiled by Bloomberg.

Because stock offerings are riskier than traditional investments, dealmakers say participation from a variety of retail investors may be a sign of financial health among consumers. It’s one more data point to those trying to gauge the odds of a recession in the months ahead. 

“There’s probably some truth to that,” said Jay Ritter, a finance professor at the University of Florida who specializes in new listings. “If you had all sorts of people hunkering down because the economy was in recession, they might not be so inclined to invest in these microcap IPOs.”

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