Since the uprising of the stock market in the 1990s, companies are turning to investment bankers and individuals to gain some financial leeway for their business. One of the most common methods for gaining capital is the process of an initial public offering (IPO), in which a company opens up the first available sale of their stock for purchase by the public. This method is sometimes utilized by larger privately owned companies, but more often than not, younger, smaller companies conduct IPOs to gain the finances to expand into a larger business.
An IPO filing is essentially the selling of portions of the company; often about 10 to 15% of the company is sold off. The reason that larger prime brokers and investors are interested in these transactions, is because with shares in the company, if the business is doing well, then they will receive money as well.
The majority of trades that happen during an IPO are conducted between large entities utilizing hedge funds. These hedge funds consist of a limited partnership of investors who make high risk investments with borrowed money, in an attempt to gain more capital. To obtain the borrowed money used in hedge funds, companies use prime brokers who offer a package of services by investment banks and securities firms to the group of partners.
A well operated hedge fund with investments bankers has the potential to provide companies offering IPO services, up to triple-digit gains just from the first day. With so much money being traded in such a short span of time, having a laid out system to handle the transactions is imperative to successful investments.
As companies continue growing larger, and smaller companies must compete, we can expect more IPOs being conducted through hedge fund prime brokers. With 2015 predicted to be the best year for IPOs since back in 2000, it’s safe to say that we will be seeing lots of new and growing businesses in coming years.