Question

3. IPO’s tend to be underpriced. Meaning that the price the shares are sold at originally is often below the price they trade at on the open market after the IPO. Thinking about the different groups involved; the firm going public, the investment bank, and the original investors, who would be upset by this and who would be happy? And why?

4. Why do PE firms and VC firms ask for so much in return for their funding?

Answer 1

3. The investment bankers charge commission and fees to carry out the IPO process. If the IPO is underprices, then the invesment bankers are not going to be happy as the amount of fees and commissions received by them would be low, in comparison to what they would have recieved had the shares been sold out at a higher price. Then the percnetage of the commission would be higher.

The original investors would be the most happy ones, as they have purchased the shares at lower price and selling them at a higher price. Thus, profiting from the investment made.

4.The private equity and the venture capitalists invest in companies that have only started out. Only when they see potential in these companies to invest large sums of money and the return generated could also be huge for these companies due to the investment made by the venture capitalisst and pricate equity firms. Since, the investment could also turn otherwise and result in huge losses , the risk factor involved is high hence they demand a much higher rate of return for their funding.