Nithin Kamath on IPO Market Frenzy: High Hopes, Dimming Returns

In a recent LinkedIn post, Nithin Kamath, the founder of Zerodha, discusses the current surge in the primary market, particularly Initial Public Offerings (IPOs), while cautioning investors against the perception of easy money.

Kamath highlights the robust activity in the primary market, noting that by capital raised, this year is already on track to match or surpass the performance of the last two years. He points to a significant pipeline of upcoming IPOs, indicating sustained interest from both companies and investors.

“While the broader markets have gone nowhere, the primary market (IPOs, OFS, and FPOs) is red hot. By capital raised, this year is already on track to match, if not surpass, the last two years. And there’s a big pipeline of IPOs coming up (link in comments).”

The founder of the popular investment platform Zerodha observed a considerable increase in IPO applications, with many individuals opening accounts specifically to participate in these offerings. This surge in interest underscores a broader trend of retail investors seeking opportunities in the primary market.

Analyzing the Odds of IPO Success

Despite the apparent enthusiasm, Kamath urges a more grounded perspective on the potential returns from IPOs. He presents data illustrating the distribution of listing gains over recent years, suggesting that while a majority of IPOs do open above their issue price, the magnitude of these gains is often modest.

According to Kamath:

“Roughly 74–80% of IPOs opened above their issue price, but a good chunk of them didn’t exactly deliver spectacular gains. In the latest period, 35% opened just 0–10% higher, while about 26% opened below the issue price.”

This analysis indicates that a significant portion of newly listed stocks offer limited upside, and a considerable percentage even trade below their initial offering price shortly after listing.

The Allotment Challenge

Adding another layer of complexity to the IPO investment landscape, Kamath points out a crucial factor not explicitly captured in the listing gains chart: the difficulty of securing an allotment in popular IPOs.

As he notes,

“the one thing this chart doesn’t show is that the more popular the IPO, the lower your odds of actually getting an allotment.”

This means that even when an IPO shows promise, retail investors may struggle to get their desired shares, further diminishing the practical chances of profiting from the offering.

A Measured Outlook

Kamath’s commentary serves as a vital reminder for investors to approach the IPO market with realistic expectations. While the primary market’s current heat is undeniable, the data suggests that chasing quick profits can be a precarious strategy. The combination of modest listing gains for many issues and the challenge of obtaining allotments in high-demand IPOs requires careful consideration.

In his concluding remark, Kamath pragmatically states, “But hope, I guess.” This sentiment captures the enduring optimism of investors in the face of statistical probabilities, underscoring the need for diligence and a clear understanding of the risks involved in primary market investments.