The amount of buzz surrounding Twitter’s (NYSE:TWTR) upcoming initial public offering is nearly tangible. The social media platform is expected to raise as much as $1.6 billion, making it the biggest technology IPO since Facebook (NASDAQ:FB) went public in May 2012 and raised a record $16 billion — and investors big and small want a piece of the pie.
The problem is, there’s only so much pie to go around — about 70 million slices, each priced between $17 and $20 — and access to the pie is not necessarily equitable. Twitter is expected to hit the public markets in just a few days, which will make the stock accessible to the average retail investor. But before that happens — before the pie is set out to eat, so to speak — institutional investors, or those with deep pockets, get the kind of privileged access to shares that only money can buy. Relatively few investors actually get allocated stock at the IPO price, while the rest are left to buy at whatever the market commands, and history has shown that highly hyped stocks (like Twitter’s) often command enormous prices relative to actual earnings.
Data compiled by Forbes shows that of all the IPOs priced since September 12, 19 have returned over 20 percent, averaging a 69 percent gain over just a few weeks. On average, these stocks opened for trading on the day of their IPO at a price 49 percent higher than their IPO price, and only experienced 9 percent further upside on average for the rest of the day. That is, most of the gains were made on the first trade, from those relatively few who were allocated slices of pie before it’s set out to eat, to the retail investor. These few experience the vast majority of the gains attributed to post-IPO price pops. Those who have to buy in once shares actually go public earn much more modest returns (and sometimes lose out over the short term, as was the case with Facebook).
So what’s the average investor to do?
1) Roll high
This is not necessarily serious advice, but it will hopefully be illustrative and reveal how certain people get access to the pie before others. The short answer, of course, is money.
The gatekeepers (aka underwriters) of Twitter’s IPO are Goldman Sachs (NYSE:GS), JPMorgan Chase (NYSE:JPM), and Morgan Stanley (NYSE:MS) (the same banks that led Facebook’s IPO incidentally). These are the guys who play middlemen between the company and the public, the money managers who structure the IPO and, well, manage the money. The banks will either buy the entire IPO from the company and re-sell it to the public, or make a so-called best effort to sell as many shares as they can.
Whatever the case, these are the guys you go to if you’ve got a couple hundred grand burning a hole in your pocket. These buyers are typically institutional investors such as hedge funds, or wealthy individuals hungry for yield in this wonky, low-rate market we seem to be trapped in.
Most of us, though, don’t have a few hundred grand in our pockets (or our savings accounts, for that matter).
2) Tap the secondary market
Twitter is not yet public, but that doesn’t mean there aren’t shares of the company floating around out there, populating the “high growth” sections of investment portfolios. Twitter, and pretty much every other company under the sun, will issue various forms of equity while still a private company, either as compensation to employees, payment for an acquisition, or to large private investors. These are sometimes laden with so many terms and conditions of sale that they are frozen solid for months or even years, but sometimes they are able to be traded, albeit illiquid.
Enter services such as SecondMarket and SharesPost, which are both platforms that enable those who hold private equity in companies like Twitter to transact with interested investors outside the regular circle of insiders. This, of course, is no sure thing — the barrier to entry in terms of raw dollars can still be very high — but it’s an option to consider.
3) Invest in those who managed to get in on the IPO
The next best thing to getting a piece of the pie before it gets bid up by every other hungry investor in the market is to invest in those who managed to get a piece of the pie for themselves. And, believe it or not, there are some funds that make this strategy pretty easy. Take, for example, the T. Rowe Price New Horizons (PRNHX) fund, which has in fact invested in Twitter (as early as 2009) and can offer many investors the opportunity to reap some gain from the explosive positive price action expected from the social media company.
Be careful, though. There are funds such as the First Trust US IPO Index that, while totally legitimate investment candidates, invest in IPOs once they are already in the market. Just be sure that the fund you are investing in has a piece of the pie at the IPO price, if that’s what you want to capitalize on.
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