Steve Garmhausen: What are you telling clients who express interest in IPOs? They’re buzzy. It isn’t always possible to get access, and it isn’t always wise. How do you set the perspective?
Matt Michaels, CFA, CFP®: With any prospective new investment, an investor needs to focus on valuation: What are they paying for the company today relative to its long-term potential.
Think about buying in to a company like SpaceX when it’s at a $500 billion valuation versus a $1.5 trillion to $2 trillion valuation, which is the expected range of the IPO. Those are very different outcomes. With anything that is pre-IPO, there tends to be less visibility into the financials, and so it can be challenging.
The benefit of owning companies is when you get in early, pre-IPO, when you invest at a valuation that’s well below what that stock might ultimately trade at. And that becomes a difficult thing to do. There are several examples of companies you get into early that have fantastic IPOs, and other ones that don’t do well at all.
Many times, there are very attractive entry points around all that noise in the first six to 12 months, in some cases at better than the pre-IPO valuations, but without the liquidity constraints [such as thin trading volumes, wide bid-ask spreads and volatile prices]. The risk of paying too high of a valuation and taking on all the illiquidity often doesn’t make a lot of sense for many investors.
We typically deal with sophisticated, high-net-worth clients, so we invest across public and private markets. When we think about private companies that are growing quickly and that might one day become public, we typically try to access them through private-equity or venture capital-type funds, where you can own a diversified pool of great companies at reasonable valuations. All of them aren’t going to be successful, but some may be, and to us that’s a better risk/reward than trying to get IPO shares.
