The Explosion of IPOs and New Investment Choices

The Explosion of IPOs and New Investment Choices

Not all companies are available to be purchased by ordinary investors. Many companies, even very large ones, are held in private hands, and have no desire to change that anytime soon. In 2016, CreditSuisse compiled a report of the listed companies on major U.S. stock exchanges over the last four decades. Although the value of the stock market as a whole may be rising, the number of choices the typical investor varies from year to year based on how many new companies get listed and how many delisted. It had been falling for the last two decades:

  • In 1976, there were 4,796 listed companies.
  • In 1986, there were 5,930 listed companies.
  • In 1996, there were 7,322 listed companies.
  • In 2006, there were 4,620 listed companies.
  • In 2016, there were 3,671 listed companies.

There are many possible contributing factors why there are fewer choices for public companies to invest in, such as: The increasing cost of regulation and compliance. The desire to stay private until the company is better established. The rise in availability of venture capital outside the stock market. Being able to be merged or being acquired by a larger company.

It’s a question of whether the pros outweigh the cons for listing (or delisting), and in the last five years since CreditSuisse compiled the report, the dynamic of wanting to be listed may be bouncing back, at least in the short term. The number of companies that listed in 2020 rose dramatically compared to 2019 and outweighed the number of companies delisted, and more than doubled again last year to having over 1000 initial public offerings (IPOs).

Getting in on the ground floor is the best time to buy, right?

It can be very tempting to want to get in on an IPO because of their growth potential, but there are additional risks associated to investing in newly listed companies. Although one can never predict the future based on past results, the data on how the market has reacted to a new listing can be helpful in setting baselines.

According to “IPOs Had a Record 2021. Now They Are Selling Off Like Crazy” from the WSJ at the end of the year, two thirds of companies that went public in 2021 were trading at below their IPO prices, so if you selected an IPO randomly, you were more likely to lose money than make money if you held your investment. That doesn’t mean that there weren’t outsized winners too, and some of the stocks that had their IPO in 2021 more than doubled their IPO price. Taking a look at the price of all 2021 IPOs and their current trading price on on December 30th, we can see that if you had access and were able to purchase one share of each company at their IPO price, you would have made a little over one percent.

When considering initial public offerings, one might be more susceptible to emotional investing behaviors as well. Behaviors such as “following the herd” may be exacerbated by all the news surround the IPO, leading to an initial upward or downward spike, and the “sunk cost fallacy” may be exacerbated by wanting to be part of the story of the stock from the beginning. One should be extra cautious, not only about the risks posed by the company, but about their own tendencies and desires.

Long-term wealth building is about more than picking stocks.

Whether the record number IPOs of 2021 was a rush of companies that delayed in previous years all coming together at the same time, or we start to once again see a growing number of choices for stock investing every year, is yet to be seen. Either way, investing is complex, with the thousands of choices already available in the stock market and other asset classes, such as bonds. Building long-term wealth isn’t just about stock picking, it’s about assessing and addressing risks.

At Garden State Trust Company, we help clients manage their portfolios, and believe deeply that one strategy does not fit all clients. We meet with each client to create an investment policy statement so that our management can be tailored to the client’s goals, tax considerations, needs for income or liquidity, all within their appetite for risk and time horizon. We revisit this annually to ensure we stay on track, and adjust as needed when life events happen.

We strive to identify long-term investment themes, which we believe is key to long-term success, while in the short run seeking consistency in the year-over-year rate of return.

Beyond investment management, we take the next step and provide trust services. A revocable living trust makes it possible for us to step in should incapacity strike, so that there is continual management while leaving as much control in the clients’ hands as they wish. A charitable trust makes it possible to have planned philanthropy which provides additional benefits for both parties. Taking a step beyond the trust and investment services, we act as a financial concierge for our clients, providing what we call Lifestyle Management services to help overcome some of challenges that come into play in our later years.

If you’d be interested in a consultation or to make a referral, let us know, we would be pleased to share our experience.