There is an old bit of market wisdom that says that when an IPO offer is hugely oversubscribed, it usually means that somebody, somewhere has got it wrong.
Either the investors, en masse, have misjudged the attractions of an issue; or the issuing corporate has promised more than it can deliver; or the investment bank advisors have failed to guage demand for the stock, and priced it too cheaply.
Oversubscription to this degree is not fatal, and is often no more than an administrative inconvenience. But it can tell you important things about the company’s prospects, and about the nature of the market in which it is operating.
There is a significant factor of investor psychology at play here. Such a level of demand can produce a degree of expectation, or hype, about a stock, which subsequent performance, no matter how outstanding, will find hard to justify. And it often means that the potential investors in the issue are relatively unsophisticated, as likely to be looking for a quick profit as to be long-term, solid investors.
It is one of the signs of an immature market, where a preponderance of retail investors outweighs the serious, calculated interest of big institutions.But looking at the huge investor demand for Ajman Bank, which earlier this week announced it had received $13 billion (Dh47.7bn) worth of applications for $550m of stock to be traded on the Dubai Financial Market, I fail to identify exactly how the oversubscription arose.
The bank, whose founders are the most shrewd and well-connected business people in the emirate of Ajman, led by chief executive Yousuf Khalaf, have clearly identified one of the key themes of global finance of recent years – the huge demand for Islamic financial services that exists in the Gulf and round the world. Retail investors in Ajman are in good company in their enthusiasm.
The advising bank is HSBC, one of the most eminent in the world with a particular expertise in the UAE, and a leading member of the Dubai financial establishment. The credentials there are sound too.Maybe Ajman Bank will be the exception that breaks the oversubscription rule.
Can Ajman Bank break the oversubscription rule?