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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 authors calculate that around 3% of the 11,000+ IPOs they analysed generated all of the return, the rest combining to match the return of Treasury bills.1
A look at the fintech IPOs that came to market in 2021 provides some color:
As David Solomon highlights, it was a big year. In July 2021, Goldman led Robinhood’s public offering, helping the company to raise $2.1 billion of capital. All told, 39 fintech deals came to the market in the US that year, raising a combined $21.6 billion – the most active year ever in the sector.
But aside from Robinhood, these stock market debutants haven’t done that well: Three quarters are trading down from their IPO price, including one that went to zero and eight that were returned to private markets at steep discounts. Maybe it has something to do with indexation, but it’s really only the large ones that have shown any vim. Robinhood is up over 200%, Affirm is up 86%, Nubank is up 78%, and Coinbase is up 37%. The average return of the other 35 is -30%.
That’s not to say these new issues didn’t create a buzz at the time. All but nine popped on the first day of trading, gaining an average of 30%, while the few that declined lost only 7% on average. Robinhood was one of the losers, suggesting that day one performance tells us very little about the future (as Meta will testify). But the prospect of an early gain sustains demand for IPOs, giving participants an asymmetric payoff as first-day winners outpace losers in both frequency and magnitude.
For some, the first day pop reflects an inefficiency in the process. One estimate puts the amount of money “left on the table” across all IPOs in 2021 at $28.65 billion. Bill Gurley, a partner at venture firm Benchmark, has long been a critic, arguing that it transfers value from selling shareholders to banks’ preferred clients. He quotes a 1999 Goldman Sachs memo: “The hot deals are obviously a currency, which can be used to please institutions, please high net worth individuals…etc.”2
Yet the great SPAC experiment of 2021 shows that alternatives fare no better. In parallel to the wave of IPOs that took place, 32 fintech companies announced they would come to the market via merger with a cash shell in that year. Nine got cancelled but of the rest, just like the IPOs, three-quarters are trading down from their initial price. In fact, the underlying picture is even murkier. Within the SPAC cohort there are two zeros and seven others that are down by more than 90% (including three that were acquired at very low prices). The only successful case in the group, as judged by stock performance, is SoFi, which is up 181% (underlying data available below the paywall).
Whichever route to market a fintech took in 2021, most selling shareholders were lucky to get out while they could. As Buffett says, they don’t pick a time that’s good for you.
All of which brings us back to the present day: the class of 2025. Since May, there have been 11 IPOs in the fintech sector, collectively raising $7.9 billion. The biggest have been Klarna, Bullish and Circle. Some of them have been eager to come to the market for some time – both Bullish and Circle attempted a SPAC deal in 2021 that was ultimately aborted (likewise eToro, which also IPO’d recently). This is reflected in a slightly older median age of companies in the current cohort: Klarna is 20 years old, eToro is 18 years old and Circle is 12 years old. That compares with a median age of ten across the fintech companies that came to the market in 2021.
If there’s a theme to the current crop, it’s trading. The 2021 cohort included many payment companies that boomed in the wake of the pandemic. This year’s collection leans towards financialisation. As retail stock ownership grows, asset classes tokenize, trading costs come down and trading culture pervades, the stock and velocity of tradable assets goes up and the universe of users expands. This year’s crop of IPOs includes companies that sit at the nexus of this trend. To discover more about them (and get access to all my underlying data) read on.