* Not all Initial Public Offer (IPO) are the same There is always a lot of excitement whenever a company announces an IPO
* Headlines focus on the offer price, the number of shares available and the potential returns
By Duncan Mlanjira
Benedicto Nkhoma, a financial market analyst who is most followed through his ‘Inspirational and Motivational’ Facebook platform, has guided investors on how to acquire best share investment in private company businesses.
Benedicto ’Bena’ Nkhoma
Shareholding, the allocation of shares (units of ownership) in a company, is mostly understood by the elite — thus Bena Nkhoma unwraps on what is involved when a company invites the public to own shares through Initial Public Offering (IPO).
An IPO is the process where a private company sells new or existing shares to the public for the first time to raise capital.
Also known as going public, this transition allows a company to raise capital from both retail and institutional investors.
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“There is always a lot of excitement whenever a company announces an IPO,” says Bena Nkhoma. “Headlines focus on the offer price, the number of shares available and the potential returns.
“But before investing, it is important to understand what type of IPO you are participating in — not all IPOs are the same.”
1. A capital-raising IPO
This is the type most people imagine. The company creates new shares and sells them to the public. The money raised goes directly into the company to finance expansion, invest in new projects, reduce debt, improve technology or pursue other growth opportunities.
In this case, investors are providing fresh capital to help the business grow. Existing shareholders own a smaller percentage of the company because new shares have been created — a process known as dilution.
If the capital is invested wisely, the company may become more valuable over time, benefiting all shareholders.
2. An offer for sale
There is another type of IPO that many investors overlook. Instead of issuing new shares, existing shareholders simply decide to sell part of their ownership to the public.
In this situation:
* No new shares are created;
* No new money goes into the company;
* The business continues with the same assets and capital structure; and
* The proceeds from the sale go directly to the shareholders who are selling their shares.
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In simple terms, some existing owners are cashing in part of their investment, while new investors are taking their place as shareholders.
This does not mean there is anything wrong with the business. Shareholders may sell for many legitimate reasons, such as portfolio diversification, succession planning, improving liquidity, or broadening public ownership.
The important point is that investors should understand where their money is going — to the company for growth, or to existing shareholders purchasing their shares.
So what should investors focus on whether an IPO is raising new capital or is an Offer for Sale, the investment decision should always be based on the fundamentals.
Ask yourself:
* Is the business growing consistently?
* Does it have a competitive advantage?
* Are management’s earnings forecasts realistic?
* Is the valuation attractive?
* What does the forward P/E ratio tell us about the price we are paying for future earnings?
* Does the dividend policy align with my investment objectives?
The stock market rewards patient ownership of quality businesses, not simply participation in every IPO.
An IPO is not an invitation to speculate — it is an invitation to become a part-owner of a business.
The best investors do not ask: ‘Will this share price go up tomorrow?’ — rather they ask, ‘Will this business create significantly more value over the next five to ten years?’
That is the question every investor should answer before subscribing to any IPO, says Nkhoma, who offers numerous pieces of advice on diverse sectors of the economy including agribusiness.
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