After the love has gone

05 Jul 2018 / Insight

By Keith Hiscock, Yingheng Chen

After a while, we all get bored with the familiar, and our attention turns to the new and unfamiliar. The same is true of the capital markets; this month’s new issue soon fades into the background, and the attention of investment banks, brokers and investors moves onto the next thing. As the months roll by, liquidity dries up. Given the shift in economics from secondary revenue to primary, brokers and investment banks have little incentive to support their recent deals, other than the hope that the company might come back for another fundraising soon.

Weak liquidity is a disincentive for investors to get involved in the first place, since they can become trapped in a stock, making it difficult to get an Initial Public Offering (IPO) away in the first place. And, of course, it also makes it more difficult for the company to raise further money from investors, or for the original shareholders to sell down. Liquidity is, after all, what markets are all about.

Most commentators would expect liquidity to dry up after float. However, we are not aware of any research in the UK that seeks to confirm or assess this. This article will assess whether this hunch is true, before considering whether it matters, and the ways in which companies and their advisors can address the challenge.

Examining post-IPO liquidity seems particularly apposite, since new rules set by the Financial Conduct Authority (FCA), ‘Reforming the availability of the information in the UK equity IPO process’ 1, come into force on 1 July 2018.

If questioned, most people involved in the capital markets would assume that, after a short flurry of excitement in a company’s shares post-IPO, things die down. Is this true, and does it matter?

We have analysed three years of LSE data to answer the question, looking at 206 floats. Our findings might surprise many commentators.

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