Our Reasons for Caution Around Flashy IPOs

Why we are skeptical of the current IPO narrative

The companies expected to launch an IPO share a common characteristic: Extraordinary expectations are already embedded in their valuations before a single public share trades. Private markets have spent years bidding up these assets as institutional investors competed for access to perceived category winners. By the time these companies reach public markets, much of the early upside has already accrued to founders, employees, and late-stage private investors.

SpaceX is a useful example. It is an exceptional business with leadership in launch economics, rapid scaling of its Starlink network, and meaningful government and defense exposure. At the same time, recent secondary market activity and investor expectations have implied extremely high valuations with limited transparency into underlying financials. At those levels, investors are effectively paying today for outcomes that may take many years to fully materialize.

The broader history of large IPOs reinforces this concern. Many of the most prominent offerings over the past decade have struggled in the months following their debut. Even successful long-term businesses often experience significant drawdowns early in their public lives before compounding over time.

The pattern is consistent: IPO pricing is designed to serve the seller, not the buyer.

The reality of pre-IPO access

Many investors wonder how to gain access before companies go public. It’s important to address this directly and with clarity.

What investors often want is not access but time travel. They are thinking about investing years ago at valuations much lower than today’s. The reality of today is elevated prices through complex structures. As we show below, the options for pre-IPO access tend to have material drawbacks:

• Secondary market platforms: These facilitate the purchase of existing employee shares, but pricing is negotiated rather than transparent. Companies often retain rights that can block or restrict transfers. Liquidity is uncertain, and the information between the seller and buyer is meaningfully asymmetrical.
• Structured vehicles and synthetic exposure approaches: These structures aggregate investor capital to acquire private shares indirectly. They tend to involve layered fees, complex legal structures, and substantial counterparty risk. Investor protections are limited, and economics generally favor the sponsor.
• Interval and retail access vehicles: These offer limited liquidity windows, subjective valuation processes, and constraints that may become binding at precisely the wrong time.
• IPO allocations through brokerage relationships: These may provide access at the offering price for a limited set of clients, often with holding requirements. While structurally cleaner, they are still subject to the valuation concerns above.

Open market participation after the IPO is generally the best choice

Buying shares after they begin trading provides transparent pricing and full flexibility. While there may be volatility, this path is designed to avoid pre-IPO premiums and structural complexity. Across all these paths, one principle is consistent: The more aggressively a pre-IPO opportunity is marketed, the less attractive its underlying economics tend to be.

Why waiting often wins

Participation in the future success of these companies does not require early access. If these companies succeed at scale, they will become meaningful components of the public equity indexes that investors at Mercer Advisors already own. Market-weighted portfolios naturally allocate capital toward the largest and most successful companies over time.

If a company like SpaceX were to list at a very large valuation, it would likely  become a major index constituent. Those with diversified exposure would participate automatically — without paying a premium, without navigating complex structures, and without sacrificing liquidity.

This approach also allows for price discovery. The early trading period following an IPO is often volatile as supply and demand find equilibrium. Lockup expirations, which are typically several months after listing, can introduce additional selling pressure and create more attractive entry points.

For investors seeking targeted exposure, allowing several quarters for the market to establish a more stable valuation is generally a more disciplined approach than attempting to participate at the initial price.

Understanding post-IPO behavior

The early life of public companies is often uneven. Many IPOs experience strong initial enthusiasm followed by a period of adjustment as expectations are tested against results.

The data on large offerings is instructive.

Source: Reuters, Stansberry Research, YCharts.

As the table shows, the largest IPOs in recent decades have had a highly mixed track record in the first three to six months after listing. Only two of the ten were positive six months later.

This has several important implications for how we guide clients:

• Early returns are driven as much by positioning and sentiment as by fundamentals.
• Initial pricing often reflects peak optimism rather than a conservative entry point.
• Even strong long-term companies frequently experience meaningful drawdowns before compounding.

This is not an argument against IPO investing. It is a reminder that the path is rarely linear and that patience is often rewarded. Many of the most successful long-term investments were made after the initial volatility, when expectations had reset and the business trajectory was clearer.

Key talking points for investors (who are not employees of the IPO firm)

• On not wanting to miss out: The key question is not whether this company is a great company. The key question is whether the investment is a great investment at the price and through the structure available today.
• On pre-IPO access opportunities: Structures such as secondary market platforms are designed to provide access, but the pricing, fees, and constraints tend to work against the investor. Public markets typically provide a cleaner and more flexible entry point.
• On existing portfolios: Investors will likely own these companies over time through their existing holdings. The decision is whether to pay a premium for additional exposure now or allow the position to build naturally.
• On timing: Historically, many of the strongest long-term investments were made after the initial excitement faded and the market had time to assess the business more objectively.

Guidance for employees of the IPO firm and early shareholders

Investors who are employees or early shareholders in these companies have a fundamentally different set of considerations. Their primary risk is concentration, as their income, career trajectory, and professional network are already tied to the company. Retaining a large financial position in the same asset compounds that exposure. Often, our main objective is to help these clients convert concentrated equity into durable wealth.

This means understanding vesting schedules, tax implications of options, and potential tax exposure. It also includes evaluating company-sponsored liquidity opportunities thoughtfully rather than emotionally. After an IPO, the focus shifts to disciplined diversification, and establishing a plan to reduce exposure, often through systematic selling programs, is critical. Proceeds should be treated as part of a broader asset allocation strategy instead of as a standalone windfall.

Setting clear concentration limits in advance helps remove emotion from decision making during periods of rapid price movement.

Main takeaways

IPO cycles test discipline. They bring urgency, social validation, and the fear of missing out to the forefront of investors’ behavior.

• Our role as fiduciaries is to ensure that decisions are grounded in a careful assessment of the structure of an investment opportunity, the valuation currently available, and the long-term outcomes over short-term narrative and sentiment.
• We will likely take on exposure to these firms after the IPO because of our systematic, ruled-based approach to public equities at Mercer Advisors. Allocations made to these companies in our investment strategies will be driven not only by valuations and profitability, but by the market’s consensus assessment of the opportunity. Our investments in these companies are made in the context of broad diversification.
• We have many strategies to help diversify and manage concentrated positions in a tax-efficient manner for those who are already investors, such as those with employee equity or private market exposure to the firms in question.

More insights are available from our CIO and investment team.