Anchor investors don't rock IPO boat, play long-term game

Shares of Avenue Supermarts, the operator of D-Mart stores, dropped over five per cent on Tuesday after the 30-day lock-in for anchor investors ended. While doubling of the stock price of the retailer might have prompted some investors to make a quick buck, anchor investors typically invest for the long haul, if stock performance is to go by.

Analysis of stock prices' performance for IPOs listed since 2016 shows end of the lock-in period is not a telltale sign for buying or selling a stock. For instance, the average one-month returns for the top 15 IPOs since 2016 is 1.66 per cent (over first day closing price), while the 10-day and 30-day performances (over closing price before the end of lock-in) are much better at 3.2 per cent and 8.7 per cent, respectively. The trend is similar for all the 30 new companies that have come out with a public issue since 2016. In other words, there is no sustained selling pressure witnessed after the end of 30-day lock-in.

"You can't say with a wide brush but most anchor investors stay for a much longer horizon. Anchor investors are typically long-term players with a large pool of patient capital," says V Jayasankar, head of equity capital markets, Kotak Investment Banking. 

Anchor or cornerstone investors are institutional investors, such as mutual funds or sovereign wealth funds, which buy substantial shares in the company just before its IPO opens for subscription. As these investors research well, their investments are seen as a booster for a company's IPO prospects. 

It is worth nothing that anchor investors can get allotment of up to 30 per cent of the IPO size. Those who apply in the IPO get allotment on a proportionate basis but anchor investors are given allotment at the discretion of the company or the investment bankers. In return, they have to observe a compulsory 30-day lock-in from the date of allotment, which is typically two-three days before the listing.

Interestingly, most of the gains for an IPO are witnessed on the first day of listing. The top 15 IPOs since 2016 have had an average first-day pop of 21.5 per cent, while that for all the IPOs since 2016 is 17.5 per cent.

Experts say investors who apply in an IPO just to pocket listing-day gains exit on the first day itself. These are typically high net worth individuals (HNIs) who place leveraged bets. Most other investors stick around for at least a year to avail gains, they add. Short-term capital gains tax of 15 per cent is levied on investments with holding period of less than a year. Meanwhile, gains made on investments with holding period of more than a year are exempt from tax. Investment bankers said, although an anchor investor has a longer horizon, a lot also depends on other factors like market conditions and valuation. "If market conditions are positive, not just anchor but other investors too prefer staying invested longer. Growth outlook, performance, and valuations are other important parameters, which investors keep an eye on. Also, if a stock exceeds return expectations, anchor investors can exit their investments immediately after the 30-day lock-in," said an investment banker.

In 2014, researchers Amit Bubna and Nagpurnanand Prabhala said anchor investors don't flip shares after end of lock-in.

"We find that anchor-backed IPOs are better performers over the long term than issues without anchors for time periods of up to one year. These benefits accrue in case of more opaque offerings, that is, smaller IPOs and IPOs led by less-reputed underwriters. Anchors do not appear to be short-term flippers," they said.