For some curious reason, many investors are lining up to buy IPOs. They can’t wait to put their hard-earned money into the next hot investment. But do they really know what they’re actually buying?
These days, I don’t think they do…
Let me give you a tiny bit of background. An IPO is an initial public offering where the public can buy shares in a company for the first time.
To the public, it sounds like an exciting prospect.There are many private companies today that investors can’t wait to invest in, like DoorDash or AirBnB.
However, consider why a company would want to move from a private to a public company.
Why would they do this?
Going public involves a mountain of paperwork, audits and ongoing reporting requirements. And that’s not even counting the millions of dollars the entire process costs.
So why should a company go through all this effort? After all, if a company is successful, that probably means everyone in the company is making money, right? Why would they want to sell a portion of their business to the public?
Well, there are a number of reasons for that.
The main reason is that the company receives liquidity… or rather, the early company founders and investors receive liquidity.
Think about that for a moment when you’re buying an IPO. As an investor, you are literally putting money into the pockets of those early founders and investors.
That’s not always a bad business.There are a lot of companies that have become very successful after going public. The investors who bought those companies are very satisfied because the stock prices have kept going up.
But there is also another aspect.
How do you know why a company goes public? Is it to bring more capital into the company so it can continue to expand? Or is it because it’s simply trying to cash in at the expense of new shareholders?
Let’s look at the company Bumble $BMBL as an example.
Regulatory constraints aside, low interest rates and high liquidity in private investment companies have allowed companies to raise significant funds in the private markets.
That finally may change. Investors, bankers and analysts said they expected a wave of initial public offerings to bring some of the most highly valued and recognizable start-ups to the public market over the next 18 to 24 months — and billions of dollars in returns to their executives and investors. The potential bonanza would follow years of waiting as a few dozen companies amassed valuations without precedent in the private market.
But what does that mean for the new shareholders?
As the economy continues to be in this record-breaking bull market, private companies realize that it’s now or never for their IPO. They realize they must go public to get more liquidity. They need to offload!
Of course, the public will be there to make that exit happen. New investors will be lining up to acquire shares in tech giants that were previously only available to insiders.
You have to ask yourself something…
Are you investing in a company that has even more potential? Or are you investing in someone’s big exit?
If there is indeed a new wave of IPOs, you will know exactly what is happening. Private companies will try to get money for their speculatively high valuations before the cheap money environment disappears.