Recent debutantes on the Singapore market have all done extremely well. Check out SunVic Chemicals has nearly tripled in price since listing one week ago, and Unionmet has more than doubled since listing two weeks ago. But it's not difficult for IPOs to do well at the moment, given the favourable sentiment, strong underlying gains in the market and the incredibly small public floats. And the current gains may be short-lived, depending on the moves by the institutional shareholders who buy in during the roadshow. In fact, my view is that the teeny weeny number of shares made available to retail investors creates distortions in the market which, inevitably, will hurt small shareholders.

Here's why:

The stock market is a large, continuous auction where sellers try to divest their stocks for as much money as possible, while buyers try to acquire shares for as little money as possible. The benefit of a public, liquid market is the efficiency of pricing. The so-called "price discovery" process assures that the price paid for a stock is the one deemed most fair by buyers and sellers at that time. Notwithstanding daily volatility, only once the view of what is its fair price changes does the stock move up or down in large steps. This is what is called a rerating.

In my view, however, this natural price discovery for newly listed companies is skewed when the public float is too small. The supply-demand equation is distorted. In an IPO of 100 million shares, if only three million shares are held by retail investors the market behaves like there is only supply of three million shares. But all shareholders, including the large institutions that bought in during the roadshow, benefit because each and every shareholder can value their shares according to the market price. You end up with three million shares in a pressure cooker, while 97 million shares held by the big money are effectively out of circulation.

Corporate financiers and companies going public like it this way. They want the stockprice to be bid up on the first day, so that everyone's shares are worth more and they can claim a 'successful listing'. The company is happy that their shareprice rose on the first day, institutional investors are happy that their investments are worth more than they paid for, and the corporate financiers are happy because their smiling faces will be on display in the photographs that get taken at the bar that night to celebrate their listing.

That is, of course, until the big money wants to sell out and take advantage of the high prices. All of a sudden, the extra supply of shares inevitably leads to a sharp fall in share prices and retail investors, who've been bidding up a small number of stocks, are left carrying the can.

This does not speak to me of a mature, sophisticated market. In my view the number of shares offered to the public should not be any less than 10% of the total float. That's still a small proportion, but better than the handful of shares that are released to the public at the moment. Chemoil's IPO went 97% to institutional investors. GEMS TV sold only 14 million out of 271 million shares to the public.

Again in my personal view, retail investors should be particularly weary of IPOs where the institutional portion was only 2-3 times subscribed, and the public tranche many more times over.

The ultimate effect of this will be that IPOs will not have the runaway rise in their stockprices on their first day of listing. This will be as disappointing to the institutional shareholders as well as to the punters who stag or flip their IPO shares on the first day. But in my view this is still better than the alternative 'wild-west' style of coming to market.


Mark Laudi