IPO Allocation Strategy — Who Gets How Much

There is no single formula for IPO allocation. Two investors who submit the same price on the same day may receive different allocations. What creates that difference is the lead bank's 'allocation discretion.'

Why allocation matters is clear. First, post-listing price stability depends on investor composition. More long-only institutions means lower price volatility. Second, allocation is the currency of the long-term relationship between lead banks and investors — a fund that received good allocation this time will actively participate in the next deal.

The third and most sensitive reason: allocation imbalance can become a regulatory issue. Korea's Clawback mechanism was designed precisely to correct this imbalance.

The four investor types each have distinct allocation logic. Cornerstones receive pre-guaranteed allocation through pre-IPO commitments. Long-only institutions receive priority allocation based on their contribution to price stability. Hedge funds receive limited allocation based on short-term trading history. Retail investors receive mandated allocation per regulation.

Allocation ratios vary by market, deal type, and oversubscription level, but lead banks' allocation philosophy universally prioritizes 'building a long-term shareholder base.'

Right after the bookbuild closes, the longest night begins at the lead bank's syndicate desk. From D-2 through D morning, a 6-step intensive process finalizes every number in the IPO.

In this process, price and allocation are determined simultaneously. As price rises, some investors drop out; as it falls, the oversubscription ratio increases. The lead bank searches for the equilibrium point that optimizes both variables simultaneously.

The Greenshoe takes its name from the 1919 IPO of Green Shoe Manufacturing Company, where it was first used. Its official name is the 'Over-Allotment Option,' regulated under SEC Rule 10b-4.

Core of the mechanism: the lead bank secures the right to distribute up to 15% more shares than the IPO offering size. This additional volume is initially distributed as a short position, then settled in two ways depending on subsequent price movement.

In the ARM IPO (2023), the stock price quickly exceeded the IPO price post-listing, triggering exercise of the Greenshoe option. The over-allotment was resolved through additional issuance — a textbook case of Greenshoe serving as an additional capital-raising tool for the issuer when prices rise.

Clawback is a forced adjustment mechanism that transfers part of the institutional allocation to retail subscribers. In Korea, it is mandatorily triggered when retail subscription competition exceeds 10x.

Korea rule: 10x+ competition ratio → up to 30% can be transferred from institutional to retail allocation. The purpose is to guarantee small investors' access to IPOs.

LG Energy Solution case: 69x competition ratio → Clawback triggered → retail allocation expanded to 26% (initial target 20% → 26%). Institutional allocation was reduced from 80% to 74%.

Lock-up is a contractual clause preventing specific shareholders from selling shares for a defined period after IPO. The lock-up expiry (typically 90–180 days) is a key 'Overhang Risk' event — price volatility tends to spike around this date.

Institutional investors and retail subscribers who received IPO allocations have no lock-up obligation. They can sell freely from Day 1. This is the structural reason lead banks prefer investors with stated long-term holding intent during allocation.

Overhang risk management is central to post-listing IR strategy. Block trades, ABB combinations, and advance disclosure of Secondary Offering timelines minimize the lock-up expiry shock.