Initial Public Offering (IPO)

Definition

An initial public offering (IPO) is the process by which a private company sells shares to public investors for the first time, listing its stock on a regulated exchange — transforming from a privately held entity into a publicly traded company with shares available for anyone to buy and sell.

How It Works

The IPO Process

An IPO typically unfolds over 6-12 months through these stages:

1. Preparation (3-6 months) The company selects underwriting banks (investment banks like Goldman Sachs, JP Morgan, or in Poland — PKO BP Securities, mBank) to manage the offering. Auditors review financials. Lawyers prepare regulatory filings.

2. Prospectus Filing The company files a detailed prospectus with the relevant regulator — the SEC in the US, or KNF (Komisja Nadzoru Finansowego) in Poland. The prospectus discloses financials, business risks, use of proceeds, and management backgrounds.

3. Roadshow (2-3 weeks) Company executives and bankers present to institutional investors (pension funds, mutual funds, hedge funds) to gauge demand and collect non-binding indications of interest.

4. Pricing Based on roadshow demand, the underwriters set the offering price. This is typically expressed as a price range (e.g., 25-30 PLN per share) that narrows to a final price the night before listing.

5. Allocation Shares are allocated to investors. Institutional investors typically receive 70-90% of shares. Retail investors get a smaller tranche, often oversubscribed (meaning you may receive fewer shares than you requested).

6. First Day of Trading The stock begins trading on the exchange. The opening price may differ significantly from the IPO price.

The Underwriter's Role

Underwriters serve three critical functions:

• Price discovery: they survey demand to find the right price
• Distribution: they allocate shares to their investor clients
• Stabilization: for 30 days after listing, underwriters can buy shares in the market to prevent the price from falling below the IPO price (using the "greenshoe" over-allotment option)

Bookbuilding vs. Fixed Price

Most modern IPOs use bookbuilding — the final price is set after gauging investor demand. Some IPOs, particularly on Poland's NewConnect market, use fixed-price offerings where the company sets one price and investors either subscribe or don't.

Example

Consider a fictional Polish fintech company, PayPol S.A., going public on the Warsaw Stock Exchange (GPW):

Pre-IPO:

• Founded in 2018, privately held by founders and venture capital funds
• Revenue: 120 million PLN, net profit: 18 million PLN
• Founders hold 60%, VCs hold 40%

IPO Structure:

• Total shares outstanding: 10 million
• New shares issued: 2 million (primary offering — money goes to the company)
• Existing shares sold by VCs: 1 million (secondary offering — money goes to VCs)
• Total shares offered: 3 million (25% of post-IPO shares)
• Price range: 80-100 PLN per share

After bookbuilding, the IPO prices at 95 PLN per share:

• Total IPO proceeds: 285 million PLN
• Company receives: 190 million PLN (from 2M new shares)
• VCs receive: 95 million PLN (from 1M secondary shares)
• Post-IPO market cap: 12 × 95 = 1,140 million PLN (12M total shares)
• Post-IPO P/E ratio: 1,140 / 18 = 63.3x

A retail investor who subscribed for 100 shares:

• Requested: 100 shares at 95 PLN = 9,500 PLN
• Received (allocation was 40% due to oversubscription): 40 shares
• First-day closing price: 108 PLN (+13.7% "IPO pop")
• Paper gain: 40 × (108 - 95) = 520 PLN

But after the 180-day lock-up expires and insiders can sell, the stock might fall — a common post-IPO pattern.

Why It Matters for Investors

The IPO "Pop" and Who Benefits

Studies consistently show that IPOs are, on average, underpriced by 10-20% on the first day. This sounds like free money, but there is a catch known as the winner's curse: when an IPO is heavily oversubscribed (the good ones), you receive a tiny allocation. When it is undersubscribed (the risky ones), you get your full order — but the stock often drops.

Research by Jay Ritter shows that IPOs underperform the broader market by 3-5% annually over the three years following listing. The first-day pop benefits connected institutional investors who get large allocations, not retail investors.

IPOs on the Warsaw Stock Exchange

The GPW has hosted some notable IPOs:

• Allegro (2020): Poland's largest IPO at 9.2 billion PLN, initially surged 50%+ but traded below IPO price within two years
• InPost (2021): Listed on Amsterdam's Euronext, raised ~3.9 billion PLN
• Żabka (2024): Large consumer retail IPO demonstrating continued appetite for Polish companies

Polish retail investors can participate in GPW IPOs through their brokerage accounts. The process typically involves submitting a subscription order during the offering period and depositing funds in advance.

Lock-Up Period Expiration

Company insiders and pre-IPO investors are typically barred from selling shares for 90-180 days after the IPO. When this lock-up expires, a wave of selling often depresses the stock price. Watch for lock-up expiration dates before buying recently listed stocks.

Freenance tip: When you buy shares in a newly listed company, add the position to your Freenance portfolio immediately. Tracking your IPO investments from day one gives you clear data on whether chasing new listings actually benefits your portfolio.

Risks and Pitfalls

Information Asymmetry

Company insiders know far more about the business than public investors. The prospectus is written by the company's lawyers and is designed to satisfy regulatory requirements — not to give you an honest assessment of the business. Read the risk factors section carefully; it is the most candid part.

Hype-Driven Pricing

Some IPOs are priced based on narrative rather than fundamentals. A company with 50 million PLN in revenue priced at a 30x revenue multiple (1.5 billion PLN valuation) needs extraordinary growth to justify the price. Many high-profile IPOs (WeWork, Deliveroo, Allegro) traded below their IPO price within 1-2 years.

Limited Financial History

IPO companies typically show 2-3 years of audited financials. This is too short to assess management's ability to navigate economic cycles. A company that grew rapidly during a boom may struggle in a downturn.

Post-IPO Dilution

Many IPO companies issue additional shares within 1-3 years of listing (secondary offerings) to fund growth or pay down debt. This dilutes existing shareholders. Check the prospectus for authorized-but-unissued shares and any planned future issuances.

The SPAC and Direct Listing Alternatives

Not all companies go public through traditional IPOs:

• SPACs (Special Purpose Acquisition Companies): blank-check companies that raise IPO capital, then merge with a private company. Performance has been poor — most SPACs trade below their initial $10/unit price post-merger.
• Direct listings: the company lists existing shares without raising new capital and without underwriter stabilization. More transparent pricing but higher first-day volatility.

FAQ

Should I invest in IPOs as a retail investor? Generally, IPOs are not a reliable source of returns for retail investors. The best deals go to institutional investors, and academic research shows long-term underperformance. If you do participate, treat it as a small speculative allocation rather than a core strategy. Never put more than 5% of your portfolio in IPOs.

How do I participate in a GPW IPO? Open a brokerage account with a firm that participates in GPW offerings (e.g., mBank, Bossa, XTB). During the subscription period, submit your order and deposit the required funds. You will learn your allocation after the subscription closes. Some brokerages charge a small subscription fee.

What happens if I don't get the full allocation? If the IPO is oversubscribed, you receive a proportionally reduced allocation (pro-rata reduction). The excess funds are returned to your account, typically within a few business days. If you subscribed for 100 shares but the reduction rate is 60%, you receive 40 shares.

Is the IPO price always the lowest price the stock will trade at? No. Many IPOs break their issue price within the first year, sometimes significantly. The IPO price is not a "floor" — it simply reflects what underwriters could sell shares for at the time of listing. Market conditions, company performance, and sector sentiment all affect post-IPO pricing.

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