The past months we have seen a huge number of issues and IPOs. As I wrote a week ago, the number is high and almost every day I get offers to participate in IPOs or ongoing issues. Today’s offer was Kontigo Care offering me a chance to invest in treatment of alcoholism – which I will pass. Nevertheless I cannot help wonder if the high number of issues and IPOs affect the share prices of start-ups and small growth companies. Personally, I think it does – negatively – and in this post, I will try to argue why. Unfortunately, I am not a university professor with at computer full of statistics so I cannot back my thoughts with hard evidence, but let me try to persuade you, anyway.
In liberal economic theory, supply and demand sets the price. The actual price is where sellers and buyers meet, and the amount of products for sale equals the amount demanded at a certain price. This transaction takes place at a market.
The share market is – as the name indicates – also a market. There is a clearly defined marketplace where buyers and sellers meet (NASDAQ, Aktietorget etc.). Buyers and sellers have largely the same knowledge of the product (or can get it if they are not too lazy), products are comparable, and online everybody can see prices offered and amounts demanded in real time. Finally, there are a number of different buyers and sellers competing with each other to sell or buy.
The great, global share market are in reality divided into sub-markets. And submarkets tend to have their different buyers and sellers. An example: On the large-cap-market, pension funds play a large role in the price setting. On the submarkets like Aktietorget or First North, the large institutional investors never show up. On one hand, because these markets are too risky and on the other, these investors need to place sums that would affect prises. There is a huge difference if somebody demands or sells shares from Appel worth 50 MSEK (= microscopic effect on the price) or shares in Recyctec (= huge effect).
The consequence is that if suddenly a large amount of IPOs and issues occur, it will not attract demand from other markets (more investors), but lead to a new – and lower – price at the submarket.
One could argue, on the other hand, that the total book value of the start-up companies are so huge, that a few extra issues and IPOs should have no effect. It is a drop in the ocean. To some extend this is correct. Alone the book value of the 151 companies listed at Aktietorget exceeds 19 billion SEK (my own calculation), and in this huge ocean 50 MSEK for Dignitana or the 19 MSEK for Kontigo Care are just tiny drops (ok, I know none of them are listed at Aktietorget).
The counter argument is that the amount for buying each day is limited. It is cash – not the share value – that forms demand. Most investors keep low cash levels and do not buy or sell at a daily basis. Personally, I guess I buy and sell for an amount equal to maximum 5-10% of my total investment per month, often much less. Therefore, even though the book value of the companies are high, this value does not affect demand.
The effect of issues and IPOs
All this to say that to some extend demand for investment in start-ups and small growth companies are constant – at least on short term because there are low fluctuation between submarkets and because ‘free’ money ready for investment are limited. If, as it happens now, the supply of investment opportunities rise – and demand is constant – prices therefore fall.
Is there anything to do about it?, you may ask. The answer is simple: no.
The picture on top is from nyemissioner.se, where completed, on-going, and up-coming issues and IPOs can be found (in Swedish only).