It's a common refrain from retail investors — that on a hot initial public offering, retail often gets the short end of the stick. They usually have to wait until a stock starts trading on the secondary market before they can get a piece of it. By that point, it may be too late to benefit from any initial pop in the share price.
In the upcoming IPO of Hydro One, however, retail investors will have a much better chance of getting in right at the start.
Ed Clark, the retired chief executive officer of Toronto-Dominion Bank who is leading the Ontario government's Hydro One sale told the Globe and Mail that 25 to 30 per cent of the stock of the provincial utility is earmarked for individual investors.
"We obviously want to play to the retail market, because I think you'll get better pricing with this type of issue," he said.
Elliot Fishman, director of U.S. & international trading with ScotiaMcLeod, says the decision to set stock aside for retail investors is a smart move as it gets the securities into "safer hands." Retail investors are more likely to hold on to the stock over the long-term, than say a hedge fund that might "blow it back out" on day one, he says. Having a higher proportion of retail shareholders in the mix right from the get-go may help support the share price over the first few months of trading and set the stage for future share sales from the government.
The 60 per cent stake that the Liberals are selling in Hydro One will be done in tranches rather than in one fell swoop – the first one will see 15 percent of the company sold. That makes it a tricky transaction to manage.
"It's almost as if there's a bit of an overhang. [As an investor,] I know that there's more stock coming," said Bruce Campbell, president of Campbell, Lee & Ross Investment Management Inc. an independent private wealth management firm.
"If I'm the government and I'm smart I need to make this first one [tranche] go up. So I need to price it attractively and whether that's a yield, or a multiple or some combination thereof, and hopefully it goes up 4 or 5 percent, so I can do the second tranche and people will buy it."
Mr. Campbell thinks that bankers may end up pricing the stock on the lower end of the range in order to generate demand for future offerings.
The art, however, will be to not price the shares too low and then get accused of selling out too cheaply, as happened in the high profile IPO of the U.K.'s Royal Mail Group Ltd. in Oct. 2013. In that case, Royal Mail stock rocketed up almost 40 per cent on its first day of trading, which was great for investors that got a piece of the offering, but bad for the seller – i.e. British taxpayers. The Ontario government will not want to face accusations from rival political parties of leaving too much money on the table.