An investment memorandum is a document that a company prepares for investors before going public. It is a comprehensive document that contains detailed information about the company, its performance, plans for raising investment through IPO, as well as goals and plans for the future.
All necessary information for investors is provided in the memorandum. Based on the memorandum, it is possible to effectively select promising IPO placements and earn on this high-yield investment instrument.
IPOs can multiply investors’ capital several times over without exaggeration. In recent years, there have been many placements that have brought investors tens, and sometimes hundreds, of percent of profit on the first day of trading.
For traders, this is a new tool, so in this article, we want to talk about how to find the most promising IPOs using a company’s investment memorandum.
Pay attention to these 6 points
Usually, an investment memorandum is a voluminous document of 100-150 pages. But it is not necessary to study the memorandum completely. It is enough to pay attention to key points:
- Revenue dynamics. The most important section of an investment memorandum is the financial indicators. The company discloses its results for the past few years. Potential investors can assess the dynamics. If revenues are growing year after year, it can be assumed that this trend will continue in the future. It is important to look not only at revenues but also at profits. It should increase proportionally, or even faster than sales volume. Growing profits mean rising share prices.
- Credit burden. Do not choose companies with a weak balance sheet. If the volume of obligations is too high, this is additional risks for the company’s future. The total debt should not exceed half of the company’s assets.
- Investors. Information on which investors invested money in the company at early stages is available even before the company goes public. Such data can be found on specialized services for venture investors: Crunchbase, Pitchbook, and their analogs. But it is very important to analyze the composition of investors. If many well-known funds with a large number of successful investments participated at early stages, their opinion can and should be listened to. This is a good signal in favor of choosing this company.
- Underwriter composition. This is an important point that many investors miss. Underwriters are organizations that prepare a company for an IPO. Usually, these are large banks. It is the underwriters who, together with the company’s management, determine the goals of the IPO and the price at which the shares will be placed.
If the underwriter sets the price lower than the market’s expectations, then on the first day of public trading, the share price will rise. And vice versa, at an IPO at an inflated price, there will not be much demand, and prices on the market will quickly come to fair value. Investors should pay attention to 2 things: firstly, the underwriter should have a good reputation and a rich history of conducting IPOs, and secondly, the share of IPO shares that have risen over the lock-up period should be lower than those shares that have lost value. This means that underwriters’ experts underestimate shares more often than overestimate them. - IPO goals and company development plan. IPO is primarily attracting investments. The company sells a stake in its shares and receives capital from investors. It is very important where exactly this money will be spent. This point is mandatory described in the investment memorandum.
- If the money allows the company to launch new products, occupy new niches or increase profitability in other ways, this is a good sign. The fact of attracting capital through an IPO can positively…
These six factors will help you analyze the investment memorandums of companies conducting IPOs. If a company looks attractive based on most (or better yet, all) of these factors, then it has the potential to participate in this IPO. After such a simple analysis, your chances of finding a promising placement will noticeably increase.
Moreover, you don’t even need to study the memorandum to obtain this information. You can rely on analytical articles that are freely available on the internet. You can analyze companies not by yourself, but by listening to the opinions of authoritative experts.
Now, this high-yielding investment instrument is available even to ordinary traders with small capital. Try to choose the most promising IPO and participate in it.
