By Steve Evans
Retail investors are still jumping into new microcap stock listings as the international banking crisis short-circuited major IPOs in March.
Last month, 80% of the US deal flow came from companies floating IPOs of less than $50 million, according to data compiled by Bloomberg. That doesn’t include SPACs. The floats attracted retail investors, not the massive institutional buyers who do most of the stock business on Wall Street.
Institutions usually account for 90% of IPO investing in the largest deals.
Last month was different.
For example, more than 40% of the funds raised in Mangoceuticals’ $5 million IPO last week came from retail buyers, according to CEO Jacob Cohen. The men’s health company priced shares at $4 each, the minimum allowable for a Nasdaq listing.
Mangoceuticals was joined by at least three other small IPOs that priced since the March 10 collapse of Silicon Valley Bank, which essentially shut off enthusiasm during the rest of the month in larger stock sales, including IPOs, due to the perceived risk of bigger deals.
By contrast, smaller deals could more often involve cold calls from syndicate desks to prospective buyers.
Economists say increased participation from retail investors could be a sign of financial health among US consumers. At least, it’s one of the tea leaves that economists are mulling for any signs of a recession later in the year.
And what can almost all retail investors afford to buy when they’re feeling flush? Microcap stocks.
“There’s probably some truth to that,” Jay Ritter, a finance professor at the University of Florida who specializes in new listings, told Bloomberg. “If you had all sorts of people hunkering down because the economy was in recession, they might not be so inclined to invest in these microcap IPOs.”
Investors seeking alternative investment opportunities often turn to microcaps, which offer potentially higher returns. Microcap IPOs can be attractive as they see significant growth, although they are also associated with higher risk.
It would also be a mistake to ignore the impact that SPACs can continue to play in bringing microcaps to the public markets.
Though their prevalence has diminished considerably in the last year, well-managed SPACs remain a popular alternative to traditional IPOs. These shell companies often target microcap companies that are looking for an easier, faster and generally less expensive path to going public.
Investors continue to show a strong appetite for growth stocks, particularly in the tech and innovation sectors. Microcap companies that are seen as having significant growth potential may be particularly attractive to investors looking for the next big thing.
Beyond the economic factors that are having a chilling effect on big, institutional investors, there are other factors that seem to be working in favor of microcap companies.
Growth in online trading platforms and the rise of retail investors may be contributing to the surge in microcap IPOs. Retail investors, who show a willingness to take on higher-risk investments, may be attracted to microcap companies that have the potential for high returns.
Increased availability of data is another factor. As data becomes more widely available, it may be easier for retail investors to conduct their own research on microcap companies and identify potential opportunities. This could make microcap IPOs more attractive to investors who are able to zero in on undervalued or overlooked companies.
Pandemic-related changes: The COVID-19 pandemic has disrupted many industries and created new opportunities for businesses. Some microcap companies may be capitalizing on these opportunities and seeking to go public in order to fund growth initiatives.
Regulatory changes in China: In recent years, the Chinese government has made it easier for companies to go public on Chinese stock exchanges, which could be contributing to the surge in microcap IPOs globally.
The recent surge in microcap IPOs is likely due to a complex mix of factors, including changes in the regulatory environment, shifts in investor behavior, and broader economic and technological trends.
All told, IPOs raised only $2.2 billion in the first quarter. Meanwhile, another 147 U.S. companies looking to raise $14 billion are standing by, waiting for a favorable market window to open. Only 11 of those are looking to raise $100 million or more, according to data compiled by Renaissance Capital.
Clearly, the IPO pipeline, for the moment at least, is dominated by microcap companies.