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Why Big Investors Are Not Attracted To IPOs?

Value Investors say you should avoid all IPOs regardless of the quality of the stock. And they have been saying this even before Zomato, Paytm or LIC misfired.

To retail investors, such an attitude may seem derogatory. For one, these big investors make money by becoming promoters and stakeholders in companies with potential and when finally retail investors get a chance to make some bucks in IPO, they are advised against it.

Also, Retail investors have limited budgets and IPO often offers one of the cheapest deals out there to start investing in the market or just take off with listing gains.

So, why Value investors are so against the happiness of us small-time wannabe big investors? Well, they have logical reasons:

The basic problem in IPOs is that, unlike secondary market investing, there's a huge information asymmetry between the seller and the buyer. IPO companies are not understood well and that's why the risk is too heavy for small-time investors. (how many of you are actually going to read hundreds of thousands of pages of RHP).

The balance of power (in the sense of information being power) lies with the seller. The promoter has spent the preceding months carefully building up an image to ensure that the investing public has a positive image. (Did you know Buffet dissolved a good chunk of his only Indian investment Paytm just before IPO).

And one last and important point is that if a company is good fundamentally, it will give you several chances to make an entry into the stock post listing, whereas a bad stock will show true colours only post listing and exit can get tough if you get the IPO