Key Takeaways:
- With SpaceX’s recent initial public offering (IPO) and several high-profile IPOs in the pipeline, the IPO market is once again capturing investors’ attention.
- Newly public stocks can be volatile as expectations, supply, and demand adjust.
- We suggest investors build around a diversified core portfolio, with selective IPO exposure through professionally managed satellite allocations when appropriate.
IPOs are getting renewed attention, as high-profile private companies move closer to the public markets. SpaceX’s recent IPO and the possibility of future public listings from companies such as OpenAI and Anthropic have made this a timely topic for investors.
The excitement around IPOs is understandable. IPOs can give everyday investors a chance to own shares in companies they may have followed for years, but have not had the opportunity to invest in. But a famous brand, an exciting product, or a trending growth story does not automatically make an IPO a good investment.
What Is an IPO?
An IPO, or initial public offering, is the first time a private company sells shares to public investors. Before an IPO, ownership is usually limited to founders, employees, and private market investors like venture capital firms. After the IPO, shares trade on a public exchange, where regular investors can buy and sell them.
Companies go public for many reasons – to raise money, create a market for their shares, or allow early investors or employees to sell some of their holdings. One important point: many retail investors do not get to buy at the official IPO price.
That price is usually set before actual trading begins and is often allocated mainly to institutional investors and certain brokerage clients. Retail investors typically buy post-IPO companies on an exchange, at prices that may be much higher than the original IPO price.
A Great Company Is Not Always a Great Investment
With IPOs, the question is not simply, “Is this a great company?” It is also, “Is this a great investment at the price at which I can buy it?” Like all investments, price matters. A company may have strong growth, loyal customers, and a well-known brand, but if investors pay too much, future returns may disappoint.
Investors should also understand that early investors, employees, and insiders often sell their shares after a “lockup” period (typically around 180 days), creating pressure on the stock price. This does not mean every IPO will fall after lockup expiration, but it is one reason newly public stocks can be volatile. The Westmount IPO tracker shows that over 60% of IPOs underperformed the S&P 500 in their first year.
How IPOs Fit into a Long-Term Investment Strategy
IPOs may have a place in an investor’s portfolio, but we believe they should be approached with discipline. For many investors, the most practical way to gain IPO exposure is through a diversified, professionally managed portfolio rather than trying to pick individual IPO winners.
Professional managers can evaluate the company’s financials, valuation, lockup schedule, competitive position, and portfolio risk, then decide whether the stock deserves investment, and at what size. In our view, the foundation of a long-term investment strategy should be a diversified core portfolio aligned with an investor’s goals, time horizon, and risk tolerance. Smaller “satellite” allocations, managed by professional investment managers, may complement that core and can include selective exposure to IPOs.
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