Interview, Podcast
What the Surge in IPOs Means for Investors
- IPO activity and valuations are projected to remain modest, reflecting a return to normalcy rather than a boom, with first-day price pops expected to stay below 2021 and 1999 magnitudes.
- Hundreds of unicorns and thousands of private firms valued over $100 million are forecast to remain private year after year due to expanded venture capital and private equity access.
- The tech sector is anticipated to require tens of billions of dollars in expenditures for large language models, creating high barriers to entry that favor firms achieving dominance through network effects or scale.
- Successful VC-backed companies are increasingly favoring trade sales over IPOs, a trend noted from the 1990s to the present, where winners may go public significantly later, such as 2003 or 2005, rather than at peak cycle points like 1998.
- A wave of equity issuance, if it materializes, is viewed as a symptom of an overvalued market or bubble, with such phases expected to last for years rather than ending immediately.
- If a massive wave of issuance occurs involving hundreds of IPOs and trillions of dollars in new companies, investors are advised to consider underweighting the U.S. market.
- The U.S. capital markets are expected to absorb large IPOs and increased share supply from expiring lockups provided equity is retired via acquisitions or share repurchases.
- A potential shift in 2026 where major tech companies replace historical share repurchase activity with net equity issuance is expected to have major market effects, though the exact supply threshold for price pressure remains uncertain.
- Huge waves of equity issuance accompanied by significant capital expenditures are historically followed by disappointing returns for equity holders.
- IPOs are generally expected to underperform if held for three years, particularly unprofitable issuers during waves, with those bought during a super-hot market or in the first month to year advised to be avoided in favor of waiting one to three years.
- Larger companies with at least $100 million in annual revenue are expected to match market performance after the first day, whereas smaller firms are expected to underperform.
- Among tech companies, profitability is expected to be a poor predictor of long-run returns, although tech IPOs are generally expected to outperform non-tech IPOs.
- A simultaneous huge wave of equity and debt issuance by companies may signal that enterprise value is overpriced, serving as a negative indicator for both credit and equity markets.