I had mentioned this "compelling" investment opportunity earlier.
Seems the IPO was priced at US$13.50 per share below the initial price talk range of US$ 15-17 and even then only raised US$850.5 million.
This NY Times article has some quite apt quotes.
- Cobalt International Energy Inc. hoped investors would contribute more than $1 billion to its search for oil miles beneath the ocean even though it has no proven reserves and it expects no revenue for at least another two years.
- Cobalt is a risky bet, say analysts who research IPOs.
- ''IPO buyers are looking for financials that are tangible, a revenue stream that's visible and profits. They're not looking for concepts right now,'' said Scott Sweet. It is unusual for an oil and gas company to go to the public markets without reserves in place or production under way, said research analyst Nick Einhorn of Renaissance Capital based in Greenwich, Conn. ''There's a lot of risks but I think for an investor who kind of believes in this deepwater opportunity, it is a good way to get 100 percent exposure to that,'' he said.
I particularly like this last quote. It is indeed an excellent way to get 100% exposure to risks that one kind of believes in.
Nonetheless, US$850.5 million was raised.
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3 comments:
$13 dollars is rather pricy for a lottery ticket.
The whole saga baffles me. Who pays money to buy into a company that has not proven its ability to earn revenue? Where are these people? I have a bridge I'd like to sell them...
Two answers to your question.
This reply addresses what I believe is the major cause.
In the final analysis, the financial world is no more sophisticated than any other human endeavor.
People will believe the most manifest absurdities. "Sober" bankers and investors will lemming like join the rush into the "next thing". And when it proves to be the "wrong" thing, they will rush for the exits and trample innocent bystanders. For example, in the recent Dubacle, the bonds of Abu Dhabi and Qatar were hammered. There is no rational reason why this should have happened. It happened primarily due to fear. And fear usually leads to a rush to safety and liquidity.
The problem with your bridge sale proposal is that in general one needs to have a reputation and access to get a hearing. But once one has them, one can peddle all sorts of stuff.
Here's the second.
Modern finance theory holds that it is the overall risk characteristic of one's portfolio that matters. That is, it may be completely appropriate to have some very risky assets in one's portfolio. But that one would not invest all one's money in those assets.
So, I might invest 2% of my wealth in Cobalt, but not 100%.
The appropriate mix in the portfolio would be dependent on risk tolerance (ability - both financially and psychologically to bear risk), cashflow needs (if one needs cash in the near term, one needs liquid assets), tax position, etc.
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