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What Are Friendly Hands?
“Friendly hands” is a term used to describe investors in an initial public offering (IPO) who will likely hold onto the security for a long time.
Friendly hands are not interested in purchasing the new issue with the hopes of flipping the shares for a quick profit. Long-term investment in IPOs tends to reduce stock volatility, thus promoting stability that could then draw in other investors.
Key Takeaways
- Friendly hands are institutional investors who will hold the shares they buy in an IPO for the long term.
- IPO underwriters seek friendly hands to reduce the chances they will need to step in and stabilize the shares once launched.
- The opposite of friendly hands is a flipper, who is more interested in profiting from a hot IPO issue by selling almost immediately after purchasing.
- Investors who demonstrate consistent friendly behavior position themselves favorably to get larger allocations for future highly-coveted IPOs.
Understanding Friendly Hands
In the book-building phase for an IPO, the underwriter will traverse the country (or world in some cases) with members of company management on what is known as roadshows.
The intent is to market new shares to institutional investors who will place large blocks of shares in long-term portfolios. Companies that go public do not want their stock to be played with, and the underwriters and distribution group prefer not to engage in price stabilization upon launching the IPO into the market.
Therefore, as much as possible, allotments of a limited number of available shares will be directed into friendly hands.
Friendly Hands vs. Flipper
The opposite of friendly hands is a flipper.
Flippers are more interested in profiting from a hot IPO issue by selling the shares almost immediately after purchasing them from the underwriter or a member of the distributing syndicate. Whereas friendly hands intend to hold the shares for the long term, flippers don’t plan to stick around and just want to make a quick profit.
Friends With Benefits
Institutional investors who demonstrate consistent friendly behavior with IPO participation place themselves in favorable positions for future highly-coveted IPOs. By showing they are committed to owning shares for the long term, they will likely receive better allocations than flippers for a hot issue.
In fact, flippers may get zeroed out entirely on an underwriter’s book. As a company matures in the public markets, friendly hands may even be consulted by the company about corporate governance matters or key strategic issues.
Are IPOs High Risk?
They can be, yes. You often can get a lot of hype surrounding IPOs, leading to inflated issue prices that eventually burst. The growth prospects are highly publicized and it is generally harder to ascribe a value to a company that is private and operating outside of the public eye.
What Do IPO Underwriters Do?
The underwriter acts as an intermediary between the company seeking to go public and investors. This is a very important role. The underwriter helps to value the company and decide a reasonable price to charge for the shares. It also drums up interest in the IPO, buys the entire inventory of stock issued in the IPO to sell it to the public, and, if needed, may support the stock’s price in the secondary market in the initial days after the IPO.
What Percent of IPOs Succeed?
Results vary. Most companies that go public remain in business in some form. Some grow in value and use the capital they raised well. Others struggle to live up to the initial hype and handle the pressures of being a public company.
The Bottom Line
Friendly hands are the investors that participate in an IPO with the intention of holding the shares for the long term. The underwriters behind IPOs love these types of investors because they match the profile of the type of backers their clients want and reduce the chance of needing to intervene to stabilize the price. And they can be quite rare: Many investors that get involved in the IPO stage do so to make a quick profit.