As bond yields continue to drift higher, equity markets are taking the move pretty much in their stride. We have discussed in this blog on more than one occasion that as much as we look for any spikes in equity volatility, the lead for equity prices will come from the bond market. Bond volatility like equity volatility has been subdued, there are signs that it is picking up, but so far remains within the year-long trading range.
We aim to offer insights in this blog to events that are occurring around the world that may be of interest to our readers. The current event that is drawing much attention to the investment community is the initial public offering in Alibaba.
Alibaba is an ecommerce firm, the nearest description is an Amazon or Ebay designed for the Asian market. Alibaba is currently conducting what is called a "road show" to investors. When a private company wishes to go public, it generally appoints an investment bank to handle the process. In the case of Alibaba there will be several Investment banks involved. The Investment bank studies the business case, looks at similar companies that are already listed, gauges market demand and then suggests a valuation for the company. A decision is made as to how much of the company is to be sold to the public and whether the existing shareholders will sell or whether new shares will be issued. A price range is then agreed based on the valuation, a prospectus is issued and the company heads off to meet investors and explain the investment case, this part is the bit known as a road show.
Alibaba price range for the offering is between $60-$66 a share, and hopes to raise around $21bn, which would be the largest US IPO capital raising, outstripping the $16bn raised for Facebook. Pricing and IPO as we have discussed before is a tricky business: price the business too low, as many suggested was the case for Royal Mail, and the sellers feel aggrieved; price too high, as was initially considered the case in Facebook, and investor appetite is poor and the IPO may fail or trade poorly when trading starts in the open market, which was the result for Facebook.
The Alibaba road show is 3 days old and according to early reports the IPO already has demand for 4x times the amount of shares on offer. That figure is probably an exaggerated one as investors apply for more than they actually wish for as they expect to get scaled back. What is does possibly do is give one a sense of the demand there remains for equity capital to be invested as well as the feeling that investors still see the ecommerce space as one they wish to get exposure to despite some speculation of overvalued deals done this year.
For what it is worth Alibaba shares are currently trading in the grey market, a term used for shares that are about to list, which are quoted on an unlisted exchange, for example the IG index. These grey markets indicate that the trading price is approximately 20% higher than the offer price.