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.
- 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.
- As much as possible in an IPO, a limited amount of shares will be directed into friendly hands in order to stabilize the stock price.
- The opposite of friendly hands is a flipper, who is more interested in profiting from a hot IPO issue by selling it almost immediately after purchasing it.
- 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. The opposite of friendly hands is a flipper, who is more interested in profiting from a hot IPO issue by selling it almost immediately after purchasing it from the underwriter or a member of the distributing syndicate.
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.