Bad investor: why do private investors buy shares in Russian IPOs
- Elena Ruzleva Forbes Editorial
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Photo by Adam Nowakowski/Unsplash Retail investors participating in new IPOs buy shares in the hope of profiting from speculation by immediately reselling them, the Central Bank writes in its review of financial markets. Having analyzed the behavior of private investors during initial public offerings of Russian companies, the Central Bank complains that many of them do not understand the essence of the IPO
Misunderstood IPO
The wave of initial public offerings on the Moscow Exchange that began in 2023 continues this year. In five months of 2024, six companies entered the market, with private investors actively participating in these IPOs. If last year the share of retail investors in initial offerings was 73%, this year it dropped to 55%, according to the Bank of Russia’s May review of financial market risks. Moreover, this share is high in small-volume placements with a small number of participants, the regulator indicates.
The bulk of buyers of shares at IPOs are small investors. “A significant part of the investments (30–60%) were made by citizens who bought shares worth up to 500,000 rubles. Large retail investors also participated in purchases of shares during placements, but the share of their purchases was much lower,” the review says.
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The Central Bank writes that small investors may not have sufficient expertise, which could potentially lead to distortions in pricing. And large investors participate only in part of the initial placements, the regulator states.
A significant portion of investors quickly sell securities after an IPO and no longer buy them. The Central Bank also notes that in 2024 the profitability of initial placements decreased slightly compared to last year due to a more unfavorable market situation. And in offerings dominated by private investors, these returns were lower than in IPOs where large institutional investors were active.
The Bank of Russia also writes that most investors take part in at least three placements. At the same time, an analysis of complaints from retail investors shows that often even qualified investors do not fully understand the mechanics of an IPO.
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Deferred demand
Last year’s interest in IPOs began after the lull of 2022, when the market collapsed due to the start of a “special operation”*. As a result, in 2022, only one company went public: the scooter rental service Whooch. In 2023, “pent-up demand” for IPOs was triggered, says Stepan Gorbunov, an analyst at the investment bank Aspring Capital.
After foreign institutional investors left Russia and the share of retail IPOs grew, private investors began to view them as an opportunity to make quick money, says Konstantin Asaturov, managing director of the equity department at Sistema Capital Management Company.
“If the first IPOs in 2023 still largely followed the old rules of the game and issuers tried to please key institutional investors in terms of valuation, then the organizers of the placements realized that retail investors were ready to participate in almost any IPO,” says Asaturov.
At the same time, companies are not always concerned about the fact that demand from retail investors is often speculative. Their task is to attract capital and place at high prices on the primary market, and the dynamics of the secondary market are not always a priority, adds Asaturov. Retail investors do not remain in debt and participate in placements based on a short planning horizon, he adds.
According to Stanislav Kleshchev, an investment strategist at the VTB My Investments broker, up to 30% of investors sell shares during the first week after the IPO. “Firstly, speculative buying in anticipation of a price increase on the first day of trading is one of the standard strategies for behavior in the market. Secondly, many IPOs are characterized by high levels of demand and multiple oversubscription. If retail investors do not receive enough shares, some of them prefer to sell them on the first day of trading,” he says.
The Central Bank also notes the lack of diversity of strategies of private investors.
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“Take and run”
The strategies of private investors participating in an IPO often come down solely to the speculative component, says Stepan Gorbunov from Aspring Capital. This behavior often leads to serious fluctuations in the issuer’s quotes in the first days after going public, he adds.
Private investors are participating in the placement, hoping to close the position as quickly as possible with a profit for themselves, says Leonid Pavlikov, Managing Director for Equity Capital Markets at Finam Financial Group. At the same time, such investors often do not analyze the business of the company in the placement of shares in which they plan to participate. They follow the news agenda and have high expectations of how the stock price will rise after the IPO. In addition, private investors often ignore the risks of the stock market, Pavlikov states.
In general, the strategies of private investors are as simple as three kopecks, explains Alor Broker investment strategist Pavel Verevkin.
According to him, investors can apply for participation in the IPO for maximum amounts and use borrowed funds from the broker, that is, “leverage.” After that, they hope that, thanks to repeated oversubscription of the order book and other speculators, the shares will rise by 10-20% after the placement. If shares soar at the start of trading, you need to take profits while you can. “And if the placement takes place at the lower limit of the established price corridor, we must urgently flee from the shares and blame the Moscow Exchange for all the sins,” says Verevkin. He clarifies that this pattern of behavior formed after the “take and run” strategy worked successfully for private traders in 2023.
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What's next
Since the start of the new wave of IPOs, the situation on the stock market the market has changed. It all started on a growing market in 2023, when it was easy to make money by placing shares, says Pavel Verevkin. Since then, the Central Bank's key rate has increased, and the debt market has begun to offer higher returns and lower risk.
2024 placements look more “faded” with in terms of profitability, he notes. “Many of these investors are happy to continue making money, but are not ready for losses in the market,” says Verevkin.
According to Leonid Pavlikov from Finam, in 2024 the growth of capitalization of companies listed on the stock exchange slowed down. In 2023 it exceeded 50%, in 2024 it is about 8%. “Companies that went public earlier saw more dynamic and sustained growth in the overall market,” he says.
Reduced IPO yields have led to retail investors' demand for new placements waning, says Konstantin Asaturov of Sistema Capital. “There is hope that the next placements will be more in line with classic market practice and attract long-term-minded players,” he sums up.
* According to the requirement of Roskomnadzor, when preparing materials about a special operation in eastern Ukraine, all Russian media are required to use information only from official sources of the Russian Federation. We cannot publish materials in which the ongoing operation is called an “attack,” “invasion,” or “declaration of war,” unless this is a direct quote (Article 57 of the Federal Law on the Media). In case of violation of the requirement, the media may be fined in the amount of 5 million rubles, and the publication may also be blocked.
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Elena Ruzleva
Forbes editorial staff
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