Whenever a famous company announces that it is ‘going public’, the same scene unfolds – headlines dominate business pages, social media buzzes with excitement, and thousands of investors begin asking the same question: ‘How do I buy the shares?’
It is an understandable reaction. Investing in a successful company from the start of its life as a listed business sounds like an opportunity too good to ignore. But there is an important distinction that every investor should understand: an Initial Public Offering (IPO) is an event, whereas investing is a process. Confusing the two is where many investors make costly mistakes.
The excitement around IPOs is not unique to Nigeria. In the United States, Elon Musk’s SpaceX recently completed the largest IPO in history, raising about $85.7 billion (more than its initial $75 billion target) at a $1.77 trillion valuation. The offer attracted strong demand from retail investors, demonstrating how the prospect of owning shares in a well-known company can capture investors’ imagination.
Here in Nigeria, over the past few months, banks and insurance companies have raised fresh equity to meet new regulatory requirements. There has also been significant retail interest in the upcoming listing of the Dangote Petroleum Refinery. In this article, we walk through what the various terms (capital raises, rights issues, public offers and IPOs) mean and how investors should think about them.
A capital raise is how a company obtains funding to support its operations, expansion, acquisitions, or other strategic plans. Companies usually do this in two broad ways: by borrowing money through instruments such as commercial paper, bonds, and bank loans, or by selling ownership stakes to investors. Equity capital raises may take different forms, including rights issues, private placements, IPOs, and public offers.
In a rights issue, the company raises equity capital by offering new shares to its existing shareholders, usually in proportion to their current holdings. An IPO is the process by which a private company offers its shares to the public for the first time by listing on a stock exchange. The offer typically provides the company with access to public equity capital to support its growth, expansion and other strategic objectives, while also establishing a publicly traded market for its shares.
Intense publicity, optimistic narratives and heightened investor enthusiasm often accompany an IPO. While some IPOs ultimately justify the excitement, others remind investors that popularity and investment quality are not the same thing. Whenever excitement begins to outpace verified information, caution, not urgency, should become the default response.
So, should investors participate in an IPO? The answer is simple: ‘it depends’.
That is not indecision. Every company about to IPO should be assessed on its own merits.
The first consideration is the business itself. Investors should understand how the company makes money, whether its revenues and profits are sustainable, the strength of its cash flows, the level of debt it carries, and the quality of its management. A familiar brand name is not a substitute for a sound business.
The second consideration is valuation. Even an exceptional company can be a poor investment if investors pay too much for it. The quality of a business and the attractiveness of its share price are not the same thing. Likewise, the offer price should not automatically be accepted as fair simply because the company and its advisers have determined it; the advisers aim to balance the issuer’s objective of raising capital with investors’ willingness to pay. Therefore, investors should independently assess whether the valuation appropriately reflects the company’s fundamentals and long-term prospects.
The third consideration is information. The IPO prospectus, not the news headlines, is the single most important document an investor should read. It contains the company’s audited financial statements, principal risks, business strategy and intended use of the funds being raised. Reading the prospectus allows investors to evaluate facts rather than rely on speculation or marketing.
Finally, investors should recognise and be comfortable with the fact that newly listed companies often experience significant price volatility in the early days of trading as they go through a phase of price discovery, making the price you pay even more important.
Before investing in any IPO, investors should ask themselves a few questions:
Has a formal prospectus been filed with and approved by the relevant regulator, the Securities and Exchange Commission (SEC)?
Is the business financially sound? What do its revenue, profitability, cash flows and debt levels reveal?
Is the valuation reasonable, or am I paying a premium because of excitement surrounding the company?
Why is the company raising capital? Is it to finance future growth or to provide an exit for existing shareholders?
Can I tolerate potentially significant price volatility after listing?
Does this investment complement my existing portfolio, or am I making a concentrated bet driven by fear of missing out?
Ultimately, an IPO is neither an opportunity to be embraced uncritically nor one to be automatically avoided. It is simply an invitation to purchase ownership in a business at a price determined before the market has had the opportunity to establish its own view of value.
An IPO marks the beginning of a company’s journey as a public business, not the end of an investor’s analysis. Excitement may attract attention, but disciplined research, sound valuation and a long-term perspective are what protect capital and build lasting wealth.
In the end, the most important question is not whether an IPO is popular. It is whether the business, the price and the risks make sense for your investment objectives, including your investment horizon. After all, an IPO is an event, but successful investing is a lifelong process.