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Business News/ Markets / Ipo/  Retail investors often miss out on SME IPO rally. Microcap fund managers decode why

Retail investors often miss out on SME IPO rally. Microcap fund managers decode why

The SME IPO market offers lucrative opportunities for investors, but retail investors often miss out due to limited share allocation to them and oversubscription issues.

SME stocks offer potential, but retailers face challenges due to lack of resources for detailed analysis.Premium
SME stocks offer potential, but retailers face challenges due to lack of resources for detailed analysis.

In recent history, the SME IPOs and stocks have been drawing attention of investors and market on the back of significant growth, jaw-dropping returns and lucrative investment opportunities. Investors wish to diversify their portfolio and tap into the potential growth of SME businesses but noticeable trend suggest that they often miss the bus on the SME IPO rally.

Kresha Gupta, Director at StepTrade Share Services said that retail investors have a limited portion in the SME IPOs because of their allocation structure. "A number of quality SME IPOs, which are already minuscule in terms of issue size, leave a substantial portion reserved for institutional investors, leaving a relatively smaller room for individual participants," she said.

Seconding her notion, she added at the over half of Winsol Engineers IPO was reserved for anchor investors, market makers, and QIBs, which left merely 47% issue for retail investors. Even of the remaining chunk, non-institutional high net worth investors took another 14.28% of the issue size, leaving retail investors with less than one-third of the issue size.

Another reason behind retail investors missing out the SME race is the heavy oversubscription of the SME IPOs, Gupta told LiveMint after launching the SME-focused Portfolio Management Services (PMS) in Ahmedabad last week.

"These IPOs usually receive bids extraordinary subscriptions, somewhere around 100-1,000 times their issue size. Despite their eagerness to participate, retail investors get find extremely difficult for them to secure allotment. Hence, only a small fraction of retail investors manage to get a slice of the cake, while the rest are unable to capitalize on the substantial gains," she added.

To recall, Kay Cee Energy & Infra IPO was subscribed massively by 960 times, with the retail portion subscription rate coming in at 1,710.96 times. The stock enjoyed a great debut on January 5, opening at an almost 366% premium at 252 apiece compared to the issue price of 54 apiece.

The non-professional investors are not aware of SME companies and their long-term potential. Compared to mainboard companies, SME stock have lower visibility, less liquidity and a minimum investment threshold, said Yash Bhanushali, PMS Fund Manager at StepTrade Share Services.

These investors also have a wrong perception that SME companies are risky, he said, adding that higher capital contribution is the primary challenge for retailers in the SME IPOs race as they cannot buy small quantities. “If we compare beta of NSE Emerge index to Nifty 50 for long term horizon, NSE Emerge companies are relatively less risky."

Ankush Kumar Jain, Director and Fund Manager of StepTrade Share Services believes that retailers are more risk-averse than institutional investors and the risk-reward ratio in the SME companies is much better, but one needs to do their homework or due-diligence in cherry-picking the SME counter.

“SMEs, by their nature, are smaller and less established companies, which can be seen as riskier than large-cap companies. This can lead retailers to shy away from SMEs even when they are experiencing a strong rally," he told us.

Jain asserted that SME companies require detailed research and analysis for investment, but retailers typically have fewer resources for conducting in-depth examination on stocks compared to institutional investors which automatically makes it difficult for them to identify promising opportunities.

“Many retail brokerages and investment platforms tend to focus on large-cap stocks, which can further limit the exposure of retailers to SMEs," he added.

The stellar performance of several SME stocks post-listing has attracted more investors looking for high-growth opportunities. Building on the momentum from the record number of companies that went public in 2023, the IPO wave continues in 2024. So far, more than 90 small and medium-sized companies have already gone public this year, and two more SMEs will soon launch their IPOs in May 2024.

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Published: 21 May 2024, 08:24 AM IST
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