A close look at recent IPO misfortunes can help FAs offer better answers for their clients’ IPO questions.
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Source: FA-IQ, Oct. 8, 2019
MIRIAM ROZEN, FA-IQ: Financial advisors could not have missed in recent months the buzz in the media, most of it negative, about flashy IPOs and their high profile fizzling. A close look at IPOs’ recent misfortunes and the shrinkage of the roster of publicly traded companies, will help FAs offer better answers for their clients’ related questions.
For the shared office space giant’s WeWork’s IPO, the Jewish High Holidays qualified as an initial deadline. But all that’s changed.
A person with knowledge told The New York Times it might “wind up being scrapped entirely.” Then it was official: the WeWork IPO was not happening.
ADAM NEUMANN, WEWORK: This was always about changing the world and building something very big.
MIRIAM ROZEN: The cancellation came despite any enthusiasm its founder (but now jettisoned) CEO Adam Neumann and one of its celebrity partners, actor Ashton Kutcher, had only six months ago for the company and its long-term rollout strategy
ASHTON KUTCHER: The minute that you start having to report publicly, you have to start playing games with your numbers. You have stuff like games with your growth. And usually the person that loses in that situation is the consumer.
MIRIAM ROZEN: The prequel to WeWork’s debacle was the once much-vaunted Uber’s IPO.
Despite the hoopla about the ride-hailing company as a disruptive powerhouse, its stock price had a precipitous drop over the last 6 months, with a more than 30% decline from its IPO price.
Bad news about the company keeps coming, with a new law on California books undermining its business plan to have all its drivers treated as independent contractors rather than employees.
Mike Isaac, a reporter covering technology for The New York Times, who recently authored a book about Uber, told FA-IQ, “I think we’re absolutely in a time where the public markets have a less rose-colored view of enormous, money-losing businesses like Uber, Lyft and WeWork, and that’s going to be a rude awakening for the late-stage private investors who hoped to cash out at the IPO finish line.”
Given the disappointing results of these high-profile IPOs, should Main Street investors fear they miss out because the publicly trading equity markets are shrinking?
The number of listed companies in the U.S. hovers around 4,000, about half the amount of a 1996 high point, and the trend has persisted for the past five years, according to the World Bank.
Or should they cheer on Securities and Exchange Commission Chairman Jay Clayton, who advocates for helping non-accredited Main Street investors – translation, not just rich cats -- get into the private equity market?
Carol Schleif, the deputy CIO for Wells Fargo-owned Abbot Downing, which sets $25 million in investable assets as the minimum for all its clients, offers reasons to press pause on Clayton’s plan.
CAROL SCHLEIF, DEPUTY CIO, ABBOT DOWNING: I understand the concept of wanting everyone to have full and equal access to stuff. But there’s some issues in terms of really, truly understanding private capital, and there are some very long-term lockups. You have to make sure that the people that are providing that information and dealing with the clients there understand that. So private capital isn’t right for everybody.
MIRIAM ROZEN: But Schleif agrees the shrinking publicly-traded markets present problems for investors.
CAROL SCHLEIF: The shrinkage is nerve-wracking both because of what it does to valuations, because you’ve got more and more and more people wanting to participate in the public markets, and yet we’ve cut the equity outstanding by half since the late '90s. So that makes it more difficult with more people chasing fewer and fewer securities out there, and the choices are more limited.
MIRIAM ROZEN: Ross Gerber founded Los Angeles-based RIA Gerber Kawasaki, which serves mostly the mass affluent, not the ultra-high net worth clients of Abbot Downing. Gerber stops his clients from jumping into IPOs, even though publicly traded markets are shrinking and even when those initial offerings look better than Uber’s or the thwarted WeWork’s.
ROSS GERBER, PRESIDENT & CEO, GERBER KAWASAKI: We generally stay away from IPOs for at least six months after they go public for various reasons, you know, mostly because we think it’s kind of like floating a boat for the first time. We’re not really sure how good the boat is. So let’s see how it floats for a couple months. And also giving public investors some time to see some earnings reports.
MIRIAM ROZEN: Gerber also is in no rush to get his clients into the private equity markets.
ROSS GERBER: Moving into private equity, which is a very high-cost place to invest, isn’t necessarily the best thing for investors just because of the perception there might be better value in the private markets. The fact of the matter is, many of the private stocks that we see are overly inflated and now coming down to earth so I think there’s a lot of risk in that and it’s not probably appropriate for a lot of investors.
MIRIAM ROZEN: Bottom line for many advisors: Don’t encourage IPO or PE enthusiasm in your Main Street investors.
This is Miriam Rozen of Financial Advisor IQ.