BlackStone’s IPO, Information Cascades, and Oversubscribed IPOs

It’s like a medieval chorus:
        Blackstone’s IPO is six-times oversubscribed.
        Blackstone’s IPO is six-times oversubscribed.
        Blackstone’s IPO is six-times oversubscribed.

The implication, of course, is that with so many people hungry for shares the private equity firm’s impending IPO will do a moonshot out of the gate. It is essentially a straightforward supply/demand argument — lots of people want it, but only a few can have it, so it will fly — but is it true?

Not necessarily. While Blackstone’s IPO will likely do well, it doesn’t directly have much to do with its oversubscribed status. There are oodles of reasons, but essentially such supply/demand arguments break down around IPOs. Consider:

  1. Pre-offering buyers are not the same people as post-offering buyers. The people who want to own your IPO at pre-offering prices are a very different crew from the first-day nutters. Up-front buyers tend to be more sophisticated, and tend not to be interested in buying anything other than broken IPOs in the first few days after listing. They won’t support the price.
  2. There are precious few “moderately oversubscribed” IPOs. There are oversubscribed IPOs, and undersubscribed IPOs, but not many in the middle. The reason should be obvious, but it has to do with information cascades. Investors rely on information about others investors’ IPO interest, and one of the primary mechanisms is indications of over- or under-subscription from underwriters. As a result, at the first hint of being oversubsribed, everyone piles in, thinking that they won’t be able to get any allotment. At the first sign of moderate interest, many investors abandon ship, leaving few IPOs straddling any sort of middle ground — and making “heavily oversubscribed” a largely psychological descriptor.

Related posts:

  1. Information Cascades, Randomness, and the Movie Business
  2. Venture-Backed IPOs on the Upswing
  3. IPOs in Q1 2007 Best First Quarter in Seven Years
  4. The Outlook for Venture-Backed IPOs
  5. The Death of Venture-Backed IPOs