The Liar’s Poker: the theatrics behind the IPO process

Initial Public Offerings (IPOs) have been a hot topic in recent weeks, with Firmus' IPO aiming to raise A$7.1 billion and give the company a slated market capitalisation of $43.7 billion. This would have been the largest IPO on the ASX since Telstra’s 1997 listing. This IPO was hotly anticipated, not only by investment bankers and existing shareholders, but also to redress the ASX's shrinking. 2026 looks to be the first time in 20 years the ASX is on track to shrink, as shares removed via takeovers, buybacks, and delistings exceed new capital raised through IPOs or equity issuance. What piqued our interest about the Firmus IPO was the pearl-clutching from many journalists about their investment bankers overstating demand for Firmus stock. As you can see from the table below, the A$215 million in investment banking fees on offer provided a strong incentive to paint only the most optimistic picture!

In this week's piece, I am not going to discuss the Firmus IPO, since there are hundreds of articles out there and being written about it, but rather how institutional investors generally approach an IPO, and the game of “Liar’s Poker” that goes on between fund managers and the investment banks running the IPO process.

Initial Public Offerings

We tend to be sceptical of initial public offerings, as sellers have a strong incentive to get the highest price. They do this by painting a glowing picture of the business they are selling and choosing the most favourable moment (to them) in the business cycle to offer shares to public investors.

Additionally, during the marketing period, new investors generally have only a few weeks to research the new company, mostly using limited financial data provided by the seller and carefully choreographed visits to inspect the soon-to-be-listed company’s assets. These conditions result in an informational asymmetry between the knowledgeable seller and the new buyer of an IPO. 

The situation is exacerbated in the case of institutional raisings such as Firmus that are sold only to sophisticated investors on a buyer-beware basis, without the additional data and oversight that a retail prospectus provides.

Source: AFR

Liar’s Poker

Liar’s Poker was the title of Michael Lewis's 1989 book. It refers to a game bond traders at Salomon Brothers played, gambling on the serial numbers of bank bills, with the strategy revolving around bluffing opponents. In an IPO or capital raise, Liar’s Poker refers to the dance between institutional investors and investment banks, especially when pricing is still to be determined.

The investment banks listing the company are motivated to exaggerate both demand for the company and its superior investment merits, while institutional investors downplay their interest, often to get the deal priced lower.

Investors try to develop a picture of the real underlying demand and to talk the issue price down. This process involves numerous conversations with the investment banks listing the new company, the company’s competitors, and other large institutional fund managers to gauge interest. In a red-hot IPO, the fund manager will be incentivised to indicate that they are believers in the story and are long-term holders seeking to build a big position post-listing, even if they are planning on selling the holding on day one to make a quick profit.

In 2018, the Australian Securities and Investments Commission’s civil action against ANZ Bank over the bank’s $2.5 billion capital raising from 2015 revealed to the investing public how this game of Liar’s Poker often plays out. The case centred on ANZ not telling the market that demand was muted, leaving the underwriting banks to sell $791 million of ANZ shares as quietly as possible over the next few months. The case was eventually settled in 2025, with ANZ paying ASIC’s costs and a $240 million civil penalty.

At the time of the raising, ANZ and the underwriters, JP Morgan, Citigroup and Deutsche Bank, indicated demand was solid. Revealing the shortfall would have put ANZ’s share price under immediate pressure, as hedge funds would have shorted ANZ shares, expecting to cover their positions later.

While the press was in a cacophony of outrage, few institutional investors would have been surprised that the banks involved misrepresented demand to minimise their losses from underwriting the capital raising.

Who gets what?

One reason investment banks are keen to run an IPO process or a capital raising (beyond the fat fees) is that, in allocating holdings, they can reward their good clients and use it as a lever to attract new clients. From my observations, large allocations tend to go to funds that generate the largest brokerage commissions, often high-turnover hedge funds rather than long-term owners.

Occasionally, the company runs the allocation process, as Amcor did in its 2009 $1.6 billion capital raising conducted at $4.30 per share, which mainly went to loyal, long-term shareholders.

Happy or Unhappy with your allocation

When I started in the industry close to 30 years ago, the thought process for a hot IPO was to decide what you wanted and then bid 5 to 10 times that amount. This was especially the case during the dot-com era around 2000.

Then, when your fund gets a fraction of the bid amount, the fund manager can either stoically accept the allocation or go into high-drama mode: threatening to stop trading with the investment bank in question and wailing about the lack of respect shown, while secretly being satisfied.

The investment bank running the IPO process is happy to indulge in this charade, as it lets it tell the company the issue was five times oversubscribed, implicitly highlighting the bank’s superior relationships with institutional fund managers.

In any IPO or capital raising, it is normally considered unfavourable to receive the number of shares originally requested. Getting your full allocation rarely indicates that the company is very keen to have your fund as a shareholder; rather, it suggests the fund manager misread the IPO's demand and investment merits.

Arguing with the Umpire

Allocations rarely change, and this has happened to me only once. In a capital raise priced at a very large discount for a financial company, my funds received only a tiny allocation, far less than our existing pro rata holdings in the company (for existing shareholders in a capital raise you should at least get the percentage of the raise equivalent to the percentage of the company you currently own). The discount was such that an immediate 15-20% profit was likely.

What was unique was that one of the funds was managed on behalf of the company doing the capital raise. Complaints to the investment bank yielded nothing; however, a direct approach to the CEO was more constructive after I pointed out that the minuscule allocation to his capital raise would cost his own clients. After some strong words from the company, the investment bank in question changed our allocation. Apparently, after the CEO left the room the night before, the slippery bankers changed our allocation, and indeed the allocation to his own branded fund, and redirected it toward higher-trading hedge funds based in Hong Kong.