Top IPO Scholar on Unprecedented IPO Wave & Why IPOs Underperform the Market | Jay Ritter

**Jay Ritter** (0:00)
Six is unique. Three companies with the largest IPOs in the history of the world, the total proceeds being raised are big. Although as a percentage of US market cap, in the same ballpark as during 99 in 2000 and 2021, they're very good reasons to be really excited about AI. But what's the right price? There haven't been all that many companies with significant revenue and really high price to sales ratios, but on average, they have underperformed. And I've got that concern about SpaceX.
A lot of money has flowed into venture capital and private equity. Prices have gotten bit up. When you buy high, expected returns are lower.
And I don't see any reason to think that a free lunch is sitting there.

**Max Wheatley** (0:58)
Welcome to Other People's Money. I'm Max Wheatley, and I'm joined today by Jay Ritter, Director of the IPO Initiative at the University of Florida's Warrington College of Business. Jay, thank you so much for joining the show today.

**Jay Ritter** (1:09)
My pleasure.

**Max Wheatley** (1:10)
People call you Mr. IPO, and we're in the midst of what feels like a historic run of IPOs with the potential for three IPOs of trillion plus dollar valuation companies. Of course, we in the media love to talk about these big nominal numbers, but there's many ways you can slice it. You can look at it relative to the overall market cap, the total issuance, combining even more IPOs than just these three, and then of course, there's inflation.
How historic is this period that we're in, given your research?

**Jay Ritter** (1:40)
It is historic, even after adjusting for inflation.
In nominal terms, until this month, the world's largest IPO had been that of Saudi Aramco in 2019, raising about $29 billion. In inflation-adjusted terms, the biggest IPO ever was actually back in 1987, when Japan privatized NTT, Nippon Telegraph and Telephone, the government-owned telecom company. In inflation-adjusted terms, that was about a $45 billion deal.
And so the SpaceX IPO was approximately twice as big. So that definitely, whether nominal or inflation-adjusted, blows away the previous records. And if it wasn't for SpaceX, it's very likely that Anthropic and OpenAI might be the first or second biggest IPO ever. As is the case, they'll probably be the second, third biggest ever.

**Max Wheatley** (2:52)
So Japan, 1987, I know the market, the Nikkei peaked in 1989 and entered a very long bear market. We just, actually in the last few years, crossed back over that peak from 1989 in the Nikkei. When you look out at the market environment, so many people are questioning whether these types of big IPOs tend to signal market tops. Do they tend to mark market turning points?

**Jay Ritter** (3:20)
Yes. And like most market predictors, there's about 51% accuracy for the predictions.
So lots has been written, and deservedly so, about how the valuations of US equity markets, my preferred measure is the Schiller-Cape ratio, are at very lofty levels. But in 1996, when Bob Schiller made his famous irrational exuberance comment, which was presented at a Federal Reserve Board meeting, and a couple of days later, Alan Greenspan used the same term, that was late 1996, more than three years before that the US market peaked at a much higher level. So, as with all predictors, well, on average, it might be correct. Calling the market peaks and troughs is really difficult.

**Max Wheatley** (4:28)
I guess another question people have is, are these valuations fair? So, you've done a lot of looking at how IPOs are valued. I think maybe we should just get into how IPOs come together, how the price is determined normally, and then we can look at this new wave of IPOs.

**Jay Ritter** (4:44)
On average, IPOs underperform after a first-day jump during the next three years or so.
But that's an equally weighted average. The evidence is that bigger companies, and my preferred measure is inflation-adjusted sales, that companies that go public where they've got annual revenue of at least $100 million, on average, they don't underperform. Institutional investors are dominating those IPOs, and typically, they're valuing the company relative to other similar companies, and on average, they get it right. Now, obviously, some companies are going to underperform, and others are going to outperform. So, if we just look at revenue, all three of these mega-IPOs are way over that 100 million mark. I've also cut the numbers for billion-dollar revenue companies, and the pattern is similar there, that the market largely gets it right. But we can slice the data other ways as well. In particular, what about companies going public at really high price-to-sales ratios? And with SpaceX, that they went public at a price-to-sales ratio of over 90, there haven't been all that many companies with significant revenue and really high price-to-sales ratios, but on average, they have underperformed.