I have received some grief for my previous post, Why I Don't Buy IPOs? Some readers were a bit shocked at how I could be a VC yet not buy IPOs. I wanted to follow up and clarify a few things. First, as I mentioned, IPOs can be a great investment if you have the chance to get in on a tranformational company. The problem is that access is still a huge problem. If you aren't a major financial player, you will have trouble getting in on an IPO of a very solid company. Notice that I am not referring to a "hot" IPO. A good IPO and a "hot" IPO are not always the same thing.
Secondly, there are several reasons why I don't buy IPOs. The two main ones are that I don't buy public stock that much because I don't have the time or the energy to research the dynamics of the public market. At the time of an IPO I do know a lot about the company, but a few quarters down the road, unless I am intimately involved in a company I will probably know its stock price but I don't scour quarterly earnings like I research S-1s.
The other main reason is that I have an abnormally large percentage of my personal assets in Private Equity. While that may seem counterintuitive or give me justification to buy public stock to balance things out, I prefer either holding Private Equity or cash. I have already mentioned that I do own some significant autopilot type of investments in public stocks, but the underlying holdings of those vehicles are not under my control.
One last reason is this - a VC or anybody who sells an interest or security to someone else has a fiduciary duty to be a responsible manager of their interest. When a company goes public that I invested in privately, I have to make a determination whether it is in the best interest of the LPs to realize their gain or not. As you have already read, more often than not, it is in their best interests to liquidate. One thing I did not mention is that liquidiation does not necessarily mean that the stock is sold. We are allowed to distribute stock and record the gain in our return books as of the day we distributed the stock to the LPs. So if our LPs decide in their own judgement to hold their stock rather than sell it, that is their call. We did the best we could and gave them the stock at a price that we determined was the best return possible on their private investment.
Suffice it to say that whether an IPO is bought or sold at the offering is more complicated for someone in the private equity industry than to the average person wondering whether it is a good stock or not. Every person has to deal with their own personal and financial circumstances. The VC additionally has to deal with the interests of his LPs.
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