⏳ Reading Time: 3 minutesIt looks like the window for Initial Public Offerings (IPOs) is open. SpaceX has announced its plans to list in the next couple of weeks. We’ve heard similar rumblings from Artificial Intelligence businesses OpenAI and Anthropic, who are hoping to list in the second half of the year. While we don’t invest directly in IPOs, the news has prompted a number of discussions within the team.
In general, we should welcome IPOs. Globally, the number of listed companies has been shrinking for years, partly reflecting the burden of being a public company, the greater availability of private capital and increasing industry consolidation. That’s not great news for public market investors, who would rather have more listed companies to choose from. Increasing the investable universe should be a good thing.
That said, there are a few reasons to be wary of IPOs, at least in the short term. One consideration is IPOs as a measure of excessive optimism. The chart below shows the number of IPOs per year in the US. As you can see, during the “Dot-Com era” (the 1995-2001 period defined by the rapid commercialisation of the internet and a massive speculative stock market bubble) the number of IPOs increased dramatically as investor optimism increased. Perhaps not surprisingly, the quality of those IPOs declined as standards slipped and many of those businesses disappeared in the early 2000s. In contrast, the recent strong performance in equities has not been accompanied by a sharp increase in the number of IPOs. We think that partly reflects investor caution, but the growth of private markets has also played a role, with company owners happy to stay private (unlisted) for longer than in the past, funded by venture capital and private equity.
