Investing in an IPO
By Peter E. Bower, Founder and President, Riverplace Capital
IPO’s, or Initial Public Offerings, are in the news a lot lately. Historically, this is the way a growing company could find a broader group of investors to help fund future growth. The company may have been started with private capital from a founder or a small group of entrepreneurial investors.
Sometimes, it is not just new companies, but more mature ones that seek to broaden ownership and gain access to funding for future opportunities. Ford Motor Company went public 53 years after its founding. The Ford family felt it needed more capital to compete with General Motors. The younger Ford members also may have wanted liquidity so that some of their holding could be used for other purposes.
In recent years, many start-up companies are funded by professional investors that specialize in this type of investment. These are often organized as venture capital firms or private equity partnerships. As a consequence, many new companies have access to significant capital early in their growth cycle. This capital also allows them to stay private for much longer. They may grow quite large before ever considering a public listing.
One criticism of companies that come public much later is that so much of their potential growth has already been realized. Public investors are then merely providing a way for the private investors to realize their gain but may not have much growth potential themselves; not a good deal.
A company that seeks to go public must meet a number of requirements. They must register with the Securities and Exchange Commission (SEC) and provide a comprehensive statement describing the investment; a prospectus. In the prospectus they must show their financials, and describe their business in detail, as well as divulge various risk factors. They must also meet various listing requirements of the exchange on which they are to be listed.
Recently, some companies have gone public that are not profitable. Obviously, to attract interest from investors, there must be the prospect that further growth will lead to earnings and thus greater value. That may or may not happen, so these are quite risky investments.
After a long period of good market performance and good economic times, some investors may get too optimistic about future possibilities. That is often when risky new offerings find new investors. That seems to have happened in 2019. Not only may they be extremely risky, they may also be priced much higher than sober analysis would suggest. This may be good for the sellers but not for the buyers.
WeWork recently attempted to come public. It may be the classic example of overvaluation and hope over realism. Potential investors finally wised-up and refused to invest. However, this is after several other over-priced and over-hyped companies did come public; so sad, too bad. “Buyer beware” is the operative warning to investors. Riverplace Capital rarely invests in new offerings. We need to see solid fundamentals priced well. If you are considering an IPO investment, Talk with Us.