Class of '25

A reminder that paid subscribers get exclusive access to my podcast, Net Interest Extra. Last week’s episode was extra special: An interview with Tom Hayes who was imprisoned as part of the Libor trading scandal before having his conviction quashed this summer. During our conversation, Tom opens a letter from the Probation Service lifting his licensing restrictions. Next week, I’ll be talking to John Andrews who led Circle through its recent IPO after spending 35 years talking to investors at several of the world’s biggest banks. For access, you can subscribe here.

After lying dormant for over three years, the market for public offerings has suddenly sprung back to life. “This week, we will do more IPOs and have more IPO activity at Goldman Sachs than we’ve had since July 2021,” Goldman CEO, David Solomon, told an interviewer last week.

For some investors, this creates a compelling opportunity. When I managed money professionally, IPOs provided an attractive source of return. I’ve written before about the excitement I felt poring through Visa’s filing prospectus ahead of the company’s stock market listing, highlighting all the drivers that would make the stock an enticing investment. I’ve reminisced too about Square (now known as Block), whose 2015 IPO rewarded early public investors with 94% of the value the company has created since its founding, far exceeding the share captured by venture investors. Plenty of other deals also created value especially if the issue surged on its first day of trading, which was often the case.

But other investors are more wary. Warren Buffett has described how “an IPO situation more closely approximates a negotiated deal”:

“The seller decides when to come to market in most cases. And they don’t pick a time, necessarily, that’s good for you. So, I think it’s way less likely that, in scanning a list of a hundred securities, if you scan a hundred IPOs, you’re going to come up with something cheaper than scanning a hundred companies that are already trading in the auction market.”

He may have a point. According to research published in 2021, only 38.65% of stocks that went public in the years between 1975 and 2020 showed a lifetime return higher than the return of holding Treasury bills over the same horizon. And even among the high performers, the best returns were concentrated around just a few names (Visa being one of them). The ...