KKR/Fidelity IPO Deal Not for The Great Unwashed

Avago Technologies is set to price its IPO tomorrow night, in what will be the first test of KKR’s recent agreement with Fidelity Investments. For the uninitiated, here is how KKR described the program last month:

Through the new relationship, Fidelity will have exclusive access to retail securities that are allocated to KKR in all U.S. public offerings in which KKR participates as an underwriter, including IPOs and follow-on offerings. Those retail securities will be made available to Fidelity’s retail brokerage customers as well as to accounts managed by Fidelity’s registered investment advisor (RIA), correspondent broker-dealer and other institutional clients. KKR will act as the underwriter of all retail securities that are distributed by Fidelity under the arrangement.

I happen to be a Fidelity retail brokerage customer, so decided to ring up customer service in order to divine some more info about the offering. What I learned, however, was that this agreement is only for certain Fidelity brokerage customers. Specifically, you need to have at least $500k with Fidelity and/or have made at least 36 trades within the past year. In other words, it’s a reward for special clients, rather than a broader effort that could increase demand/price for KKR IPOs.

I asked why the distinction was made, and was given a lengthy treatise on IPO risk. I asked if Fidelity also would bar me from buying Avago stock at 9:15am on Thursday morning (you know, to protect me from myself), but was told it would not.

Perhaps a better explanation comes from David Erb, an intern with SVB Capital’s private equity group, who emailed the following:

I worked at Smith Barney back in 2006 when Vonage went public. Smith Barney offered shares of Vonage to all of its retail brokerage customers via an online site. Many of the firm’s clients opted into the program. Vonage stock took a hit right out of the gates and many of the clients refused to fork over the money they owed for their respective shares. One of the problems is that people are uncomfortable with the idea that you can create a binding contract via the internet, but regardless no one wanted to fork over $18 a share for a stock now worth $12. You can see the lesson learned and why Fidelity would want to pre-qualify candidates via a trading minimum. Perhaps the thinking is that investors with greater amounts of money or market experience will understand the risks involved in a speculative IPO.