Recently, the domestic initial public offering (IPO) market has been mentioned as showing signs of reigniting on expectations for a "mega deal." Still, Lee Seok-hun, Deputy Minister of the Financial Industry Department at the Korea Capital Market Institute, said, "It's hard to judge the mood when only one month of the year has passed," while noting, "Based on the data, the possibility is open that the market could enter a recovery phase after a slump."
Lee is overseeing domestic IPO research within the Korea Capital Market Institute, publishing reports such as "Increase in retail investors in the IPO market and evaluation of the book-building system" and "Analysis of changes in the informational value of investors in Korea's IPO market after COVID-19."
Lee said, "The IPO market grows when demand factors such as investor sentiment and stock market liquidity meet supply factors such as corporations' fundraising and growth strategies." On retail investors' participation in IPOs, Lee said, "If you chase a surge on the first day of listing, you can mistake a supply-demand illusion for fundamentals," emphasizing, "Look first at structural indicators such as the amount of tradable shares and lockup commitments." The following is a Q&A with Lee.
What are the recent characteristics of overall sentiment and capital inflows in Korea's IPO market?
"It's hard to speak definitively when only one month has passed this year. But we look at the flow through past market data, and the IPO market must be viewed from both the demand and supply sides. Demand is investor sentiment and expectations for the stock market. The better the sentiment, the more likely the potential of IPO corporations is rated highly, and corporations can list at favorable valuations. The supply factor is the growth outlook. The better the growth outlook, the stronger the incentive to raise funds for investment and expansion, and an IPO becomes an option in that process."
Can we say the IPO market, which had been sluggish in recent years, has entered a recovery phase?
"I think there is a possibility it will enter a recovery phase. Just as in the 2020–2021 boom, stock prices and investor sentiment need to be strong for the IPO market to revive. Even now, growth demand is forming in areas such as artificial intelligence (AI), semiconductors, robots, and secondary batteries, and there is an incentive to grow through fundraising. If corporations that delayed listings because valuations didn't fit have been waiting for 'when the market improves,' the opportunity could increase."
What should retail investors be most careful about in IPO investing?
"You must look at the number of tradable shares. When the holdings of major shareholders or long-term investors are restricted by investor lockup commitments and only part of the shares are tradable, the supply is limited. When the price rises then, it's easy to interpret it as 'rising because corporate value is good,' but in reality, it may have spiked due to an overload from supply-demand. It's necessary to watch calmly until the market's excessive heat subsides. In particular, in periods when tradable supply increases, such as after lockup expirations, prices can fall. The weaker the consensus among investors on fair value, the more a stock is shaken by supply-demand changes."
Why does the "post-listing surge and plunge" phenomenon repeat?
"In the early stage after listing, trading volume is highest and volatility tends to be large. In the United States, institutions have a higher share and there are more large-cap stocks, so volatility is relatively lower. In Korea, centered on KOSDAQ, there is more retail participation and investing that pursues short-term volatility. Structurally, a 'first-day surge followed by a pullback' pattern can appear. Investing should be centered on the corporation's value and assessment, but in cases like special listings, it is harder for retail investors to judge. There can be jackpot potential, but the risks are just as big.
If your information analysis capability is insufficient, you become more vulnerable in volatile phases."
How will macro factors such as interest rates and stock market liquidity affect the IPO market this year?
"Interest rates are an investing condition. The lower the rates, the greater the investing incentive. But what is most palpable in the IPO market is ultimately 'stock market liquidity.' When liquidity is good, valuations come out well; when it's bad, the market becomes very cold. IPOs are a highly volatile market. For example, a deal with a large public offering size can be influential enough to touch overall market liquidity. Also, in the early days after listing, a full consensus among investors on a corporation's fair value has not yet formed, so the price distribution is wide. If the supply is small, a portion of demand that accepts an overvaluation can pull up the price; if the supply is large, selling pressure can make it swing sharply. As time passes and information accumulates, volatility tends to ease."
What changes have recently appeared in institutional book-building competition ratios and offering price valuation methods?
"In the past, offering price valuation focused on mature corporations, so relative comparison methods posed little problem. Now, innovative corporations, loss-making corporations, and corporations with different industry characteristics also list. Because it's hard to capture potential with financial statements alone, it has become harder for underwriters to explain 'why they valued it this way.' Even with principles, there are cases that are not easy for investors to accept. If you only look at the book-building competition ratio, you get 1,000 to 1 or 2,000 to 1, but it's hard to say all of that is genuine demand. Funds seeking short-term gains can be mixed in."
How should investors use institutional book-building results in their decisions?
"Institutional book-building can be a signal. But you shouldn't jump in trusting only the institutions. Many institutions sell and exit early after listing. There are cases where issues with high retail subscriptions had better medium- to long-term performance. What matters is not the 'numbers' but the 'structure.' If lockup commitments are high, it can be a signal that institutions are bearing medium- to long-term risk, and if tradable supply is small, overvaluation can appear due to supply-demand."
What risk factor is most often overlooked in IPO investing?
"IPO issues are highly volatile early after listing. When the market rises, they rise more; when it turns down, they can swing harder. If you enter based only on short-term market conditions, the risk grows. In the end, you have to look at both 'supply-demand events' such as tradable supply, lockup commitments, and lockup expiration periods, and the corporation's 'long-term growth potential.'"
Are there industry sectors drawing particular attention in this year's IPO market?
"Theme industries such as AI, semiconductors, secondary batteries, biotech, and space and aviation are attracting attention. Government policies encouraging industry and technological advancement are creating investor expectations, and for corporations, the need to raise funds for growth investment is increasing. An IPO is not just an exit; it is also a process of informing the market of a medium- to long-term investment plan and raising capital."