Fading flotation fortunes
By Craig Coben, former global head of equity capital markets at Bank of America and now a managing director at Seda Experts.
When assessing the impact of historic events, it’s dangerous to jump to hasty conclusions. As Chinese premier Zhou Enlai famously said when asked about the French Revolution’s effects, “It’s too early to tell.” He was likely referring to the 1968 student protests, but the sentiment stands.
Many see the recent IPOs of UK chip designer Arm, food delivery startup Instacart, and marketing software firm Klaviyo as sparks reigniting a dormant new issues market. Arm priced at the top of its range, Instacart raised then priced at the upper end, and Klaviyo priced above range. All three also popped on their trading debuts – Arm closed up 25%, Instacart jumped 43% on open Tuesday, and Klaviyo surged as much as 32% Wednesday.
As MainFT wrote, September’s third strong IPO could spur more startups to pursue delayed public listings, per venture investors. Goldman’s David Kostin also said the US IPO market “re-opened this week in dramatic fashion,” signaling more normalized conditions going forward.
But momentum quickly faded. Arm shares have fallen four straight days and are barely above IPO price. Instacart dipped to just over its IPO price before rebounding slightly. Klaviyo also neared its $30 offer price before recovering 9% at the close.
With such volatility, it’s hard to interpret the action. Part of the issue is the small float for each IPO – about 10% for Arm, under 8% for Instacart, and 7.5% for Klaviyo. The 5-year average US IPO float is around 20%.
The deals also featured sizable allocations to cornerstone investors, up to 60% for Instacart, plus friends and family shares. While cornerstones can legally flip shares, there’s reputational risk in selling new IPOs fast.
In other words, supply was tightly controlled, presumably to create scarcity and demand. But tiny floats like VinFast’s, under 1%, detach prices from reality. So how small is too small?
Limiting floats makes sense – too many shares erodes pricing power and underwriters want to leave buyers wanting more. Yet ultra-low floats may impair price discovery in unpredictable ways. With limited stock to trade, prices can move sharply on small volume.
True believers may sell quickly if shares fall, fearing illiquidity will trap them. Shorts may also avoid tiny floats because shares are hard to borrow for shorting, and a squeeze risks if prices rise.
The key is finding where floats get too small to avoid distortive effects. VinFast showed sub-1% renders prices meaningless. But is sub-10% also problematic?
The reality is we don’t know. It depends on circumstances – 8% may work in strong markets but not after a 2-year IPO hiatus. Arm’s small float may be more acceptable because the $5 billion free float value is large.
As Zhou would say, it’s premature to call these low-float deals an IPO market rebound. More time is needed to tell.
