Allocation and stabilisation in an oversubscribed IPO
Kestrel Diagnostics plc is raising £192m by offering 60m new shares at 320p on the London Main Market. The offer is four times covered. A long-only UK equity income fund placed an order for 18m shares at 320p on the first day of the book. On the final afternoon, a hedge fund places an order for 10m shares at 320p but tells the syndicate it intends to 'trade the break' and may sell within days. The lead manager proposes allocating 8m shares to the hedge fund and only 2m to the long-only fund, arguing the hedge fund will provide aftermarket liquidity. The syndicate also holds a 9m share over-allotment option. On the first day of conditional dealings the shares trade at 306p. The stabilisation manager wants to buy 5m shares and later sell the over-allotment shares. A retail client who received 1,000 shares asks whether the firm can 'support the price' until his holding is sold.
1. Assess the proposed allocation between the two investors. What factors may the syndicate legitimately take into account, and what should it document?
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Allocation is not a simple price-priority exercise, but the syndicate must apply a disclosed, consistent policy and manage conflicts. The hedge fund's own statement that it may 'trade the break' undermines the liquidity rationale: short-term flipping can increase aftermarket volatility, not support it. The long-only fund's early order and likely holding period are relevant, but its order size should also be checked against its mandate and the free float. A better outcome is likely to allocate most of the shares to the long-only fund, with a smaller allocation to the hedge fund only if the policy permits and the client relationship justifies it. The syndicate should not use allocation as an inducement for future business. It should record the policy, the factors considered, the reasons for departing from a pure order-size approach, and any conflicts. If the allocation policy was not disclosed to investors, the firm should correct that before the next transaction. The lead manager should also consider whether the hedge fund's stated intention makes it an inappropriate allocation recipient under the firm's own policy.
2. Can the stabilisation manager buy at 306p and sell the over-allotment shares? Explain the conditions and the risks.
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Buying at 306p can be stabilisation because it is below the 320p offer price. Stabilisation is permitted only in a limited window, usually up to 30 days after the start of conditional dealings, by one appointed stabilisation manager, under a disclosed prospectus authority, with a stabilisation notice, records and the required regulatory notification. The manager must act to prevent or mitigate a disorderly decline, not to create a false market or guarantee a price. The 9m over-allotment is a short position: if the price stays below the offer, the manager can buy shares to cover it; if the price rises above the offer, the greenshoe can be exercised. Selling over-allotment shares after buying 5m is therefore a short-cover mechanics question, not a promise to keep the price at 306p. Risks include losing the ability to support the price once the budget is used, the over-allotment option expiring, regulatory action if purchases are not genuine stabilisation, and misleading the market about demand. The manager should keep a clear record of each order and the reason for it.
3. How should the firm respond to the retail client's request?
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The firm cannot agree to 'support the price' until the client sells. That would be an attempt to create a false or misleading market and could be market manipulation, quite separate from lawful stabilisation. The client should be told that stabilisation is limited in time and size, is not a price guarantee, and may stop at any time. If the client wants to sell, the firm should explain the available order types, such as a limit order, and execute in line with its order handling and best execution obligations. It should not promise a floor price or imply that the syndicate will protect the client. If the client is unhappy, the firm should explain the risks of investing in an IPO, including the fact that the price can fall below the offer price. The conversation should be recorded and any complaint handled under the firm's complaints procedure.