Why I Don't Buy IPOs

I've posted a string of posts reviewing S-1s. Interestingly, since my post about the Vonage IPO, traffic at my site has gone up almost 500%. I suspect that people are considering buying the IPO and are doing some research. Not that I care about readership numbers as I have removed all advertising from my site. At any rate, even though I have said I am not buying the Vonage IPO I want to add a disclaimer - this blog does not give recommendations on specific investments. While I clearly show my bias toward private equity investments, I do not recommend any specific manager or fund or investment.

I generally don't buy into IPOs or public equities that much. I used to buy IPOs and public stocks all the time, but I do not much anymore. When I do put on an occassional trade in my trading account, it is more out of boredom and in the interest of making a quick buck than for long term investing. I do have some significant autopilot type investments in mutual funds, but I really couldn't tell you their performance or whether they are 4 or 5 stars.

Why don't I buy IPOs? I am a VC. I make my money by creating value for companies. When a company goes public, the stock I have bought has already made a large multiple. I have taken the risk of illiquidity and turned it into liquidity and am duly rewarded. If I can unload at the IPO price I will make my investors a ton of money. If it goes higher I will make them even more. VCs are usually subject to 6 to 18 months of lock up of their stock, so it is my best interest to wait until a company really has momentum before letting it go public. There is no point for a VC to take a company public that will get hammered when it doesn't produce strong earning for 4 to 8 quarters after the IPO. Granted, usually a VC firm can sell some stock at the IPO offering, but usually the money comes  after the IPO.

So when I see a company going public, I know that some brilliant VC and the founders are getting liquid and cashing out. Any appreciation beyond the IPO price is GRAVY!!! But the meat is already being eaten at the IPO price.

Now this doesn't mean that money can't be made by buying IPOs or trading public equities. I in fact made my first chunk of dough by trading public equities for my own account. There are great companies out there that have made people a lot of money on the public markets. Fortunes will continue to be made on these markets. Just be aware that when you buy an IPO, you are buying something that someone has been holding onto for several years and is only now able to sell.

I'm not saying that there are not good IPOs to buy. Sometimes there is a unique company that is the major player in its space that will transform its industry. Problem is that if you are the average investor you won't get shares. But those kind of companies can always be bought on the open market after the IPO. If their chances of success are so great, then it won't matter whether you got shares at the offering price or on the open market. Trust me, there is always an opportunity to jump on the bandwagon of a great company.

Comments

[Daniel Nerezov]

James, that's an interesting perspective. I am helping a friend manufacture a new financial product.

He wants to create a fund that specialises in buying global IPOs. He wants to sell this fund to large institutional investors, with unit price of + $10 mill, by arguing that this fund can clock up greater risk adjusted returns than comparative funds (...the listing premium and all).

Do you possibly know of any instances where others have tried to manufacture similar products?

Thanks