IPOs: To Invest or Not?
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In our view, IPO investing comes with significant risk. Unless it as a “fun” satellite Buy, we don’t recommend clients buy individual IPO stocks. Here’s why.
how should I think of the Return of the IPO as an Investor?
After several lean years, 2026 is shaping up to be one of the most active markets for initial public offerings in recent memory. The excitement is understandable, but the evidence on IPO returns counsels patience over the rush to get in early.
This year is headlined by a handful of very large companies preparing to make their public debuts. SpaceX filed to go public at a targeted valuation near $1.8 trillion, which would be the largest offering on record. A cohort of high-profile technology and artificial intelligence companies are expected to follow over the course of the year. Goldman Sachs has projected that U.S. IPO proceeds could reach a record $160 billion in 2026. (1)
When familiar, fast-growing names become available to the public for the first time, the natural question is whether to try to get in. As a general rule, we do not recommend that investors participate in IPOs, and the reasoning has less to do with any single company than with how IPOs work and what decades of evidence say about their returns.
The IPO Pop can happen, but it’s Elusive
The “IPO pop,” the sharp jump from the offering price to where shares first trade, can appear but a major problem is access. Capturing that first-day return requires an allocation from the underwriting banks, and those allocations are not distributed evenly. Research has documented an adverse selection problem in the process: shares in the most sought-after offerings tend to be reserved for the banks’ best clients, while allocations that are easy to obtain are more often the deals with weaker first-day performance. (2)
The offerings an investor can readily get into are disproportionately the ones they would not want. For most investors, they can only buy on the open market after trading begins, which means paying the post-IPO-pop price rather than the offering price.
Medium-Term Performance Has Been Underwhelming
Once you set aside the unattainable first-day return, IPOs perform over their first year of public trading is sobering. A study by Dimensional Fund Advisors of more than 6,000 U.S. IPOs from 1992 through 2018 found that, as a group, they generally underperformed the broad market. (3)
A hypothetical portfolio holding IPOs from the prior 12 months returned 6.9% annualized over the full period, compared with 9.1% for the Russell 3000 Index and 9.0% for the Russell 2000 Index. The gap was widest in the most recent stretch of the study. From 2001 through 2018, the IPO portfolio returned 3.7% annualized against 6.0% for the Russell 3000.
IPO Returns Compared to Broad-Market Indices
IPOs, as a group, have tended to behave like small, growth-oriented companies with low profitability and high rates of investment. Decades of asset-pricing research associate low profit and high investment with lower expected returns. So, why are folks surprised when IPOs perform poorly?
Lockups Add Another Wrinkle
There is also a timing dynamic specific to new IPO issues. Insiders like employees and early investors are typically restricted from selling for a period after the IPO, often six to 12 months. When those lockups expire, a fresh supply of shares reaches the market weighing down the price creating more volatility and less reward than the early excitement suggested.
A Note on How Investors Try to Gain Access
Because direct access is difficult, some investors are approached with offers to invest through special purpose vehicles. These structures can carry steep fees, and in some cases a vehicle invests in another vehicle, each with its own layer of costs. We have seen arrangements where fees consumed close to a fifth of the underlying value, which makes meaningful upside much harder to achieve. Anyone considering access through such a vehicle should look very carefully at the full fee structure before committing.
The Bigger Picture
None of this means IPOs never produce winners. Some go on to deliver extraordinary long-term results. The point is that outcomes vary enormously, relatively few beat the index over time, and the excitement around a debut tells you very little about what comes next. Buying a single newly-public stock concentrates risk, which a diversified portfolio has been designed to avoid.
And of course, as successful companies grow and join the major market indices, broadly diversified investors end up owning them anyway. The large names dominating this year’s headlines will, in time, find their way into the indices that most diversified portfolios already hold, making their growth a part of a disciplined, diversified, low-cost portfolio.
The headlines always keep promising extraordinary drama and results, and some of the companies will become important elements in a diversified portfolio, but a strong long-term outcome is built on diversification, attention to fundamentals, and patience. As Georgia likes to say, “If investing is exciting, you’re probably doing it wrong.”
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