Banks like to place shares with so-called “fundamental” buyers who supposedly sit on their IPO purchases like a hen does on its eggs. They try and avoid decorating hedge funds with too much stock, suspicious that they will spiv the shares at the first opportunity in an attempt to cash in on the primary market discount.
But newly listed stocks are, at that point, at their most illiquid. Even small trades can whip the price all over the shop.
At the same time, investors are often cut back on their orders in allocations. It would be far better for them to buy in the secondary market to take them up to their desired holding.
It would help support the price of the deals they spent so much time and effort researching and deciding to invest in.
After all the trouble of meeting the management, reading the prospectus and maybe even knocking out the odd spreadsheet, you would like to think they would not suddenly change their view on the fundamental value of a company just because the share price was winging about a bit on day two of trading.
Earning a title of “busted IPO” is not something any issuer wants, and nor should any of the investors with a stake in the deal. Ultimately, they all suffer but for the willingness to put a bit more money where their mouths once were.