Why is institutional demand vital for an IPO's success?

Institutional demand is crucial for an IPO's success primarily because of the significant volumes of capital that institutional investors bring to the table. These investors, which include mutual funds, pension funds, and hedge funds, often have substantial funds at their disposal and are typically able to buy large blocks of shares during the IPO.

When institutions commit to purchasing these large quantities of shares, it provides not only immediate capital for the company going public but also sends a positive signal to the market about the perceived value of the stock. This strong demand from credible institutional investors can create a solid foundation for the IPO, influencing retail investors' sentiment and potentially leading to a successful launch and higher market prices post-IPO.

In addition, the presence of institutional investors can enhance the overall credibility of the offering, as they are usually seen as thorough analysts of the companies they invest in, which can attract additional interest from other investors.

Therefore, the significance of institutional demand lies in their ability to secure the necessary capital that is vital for the IPO, facilitating a successful entry into the public market.