Institutional investors saw their allocation of Royal Mail Group Ltd. shares scaled down as the U.K. government opted to meet unexpectedly large demand from individuals. Larger retail investors also lost out.

The government said institutional investors, who bid for more than 20 times the shares available for sale to them, will get 67 percent of the stock, down from the planned allocation of 70 percent. The shares will go to companies with a record of long-term investing, such as pension funds and insurers.

The remaining 33 percent will go to small retail investors, after the tranche set aside for them was seven times oversubscribed. All retail investors who applied for 10,000 pounds ($16,000) or less of shares — more than 690,000 people – – will receive an allocation of 227 shares, equivalent to 749.10 pounds at the maximum offer price of 330 pence, the Department for Business said in a Regulatory News Service statement. Those who applied for more than 10,000 pounds — about 5 percent of applicants — will get nothing.

“Our priority has always been protection of the consumer through the universal service obligation, good value for money for the taxpayer, and a stable long-term ownership structure,” Business Secretary Vince Cable said in the statement. “We have struck the right balance, increasing the proportion of shares going to small investors to ensure they get their fair share.”

The initial public offering raised 1.7 billion pounds, putting the company’s market capitalization at 3.3 billion pounds. A further 7.8 percent of shares, valued at 258 million pounds, is available as an over-allotment option. Conditional trading will begin today.

Europe’s Largest

Royal Mail (RYE) is the largest IPO in Europe since April 2011, when Glencore Xstrata Plc (GLEN) raised $10 billion in its London listing, according to data compiled by Bloomberg. The volume of initial offerings in the region rose sixfold last quarter, as investors returned on the back of strengthening economies and cheap valuations.

The privatization is also the biggest in the U.K. since British Rail was broken up in the 1990s. The sale of the 360-year-old company, which has refocused on package-delivery markets spurred by a trend toward web-based purchasing, opened Sept. 27 and was fully subscribed within hours.

The level of demand has led Britain’s opposition Labour Party, which wants Royal Mail kept in state hands, to question the government’s handling of the IPO. Business spokesman Chuka Umunna said this week that taxpayers are getting “massively short-changed” in a “bonanza” for speculators and hedge funds. After the details of the IPO were announced, he said on Twitter that the oversubscription level “only serves to support claims it has been underpriced.”

‘Gone Down’

Cable told Parliament’s Business Committee in London on Oct. 9 that oversubscription didn’t mean the shares were underpriced. Looking at previously oversubscribed offerings, “the trajectory of their subsequent share values has been very, very disparate — some have gone down,” Cable said.

He also rejected the suggestion that hedge funds would profit, saying he was looking to “place the shares with long-term investors.”

So-called gray markets operating ahead of the sale suggested the price will rise when trading begins.

“They’re currently suggesting a market debut that could see share prices trade above 400p initially,” Joshua Raymond of said in an e-mail. London-based spread-betting company IG said yesterday’s gray-market close implied a mid-price of 406 pence, representing a 23 percent increase on the IPO price.

(Source: Bloomberg)