Investment bankers planned to price last week’s IPO of ride-hailing firm Lyft in the $62 to $68 range. Demand for shares was so strong that the final offering price was bumped to $72 and by the end of its first day of trading on Friday shares closed at $78, giving the firm a $26.4 billion market value.
And so begins the frenzy for “unicorns,” those privately held tech firms that have been valued at $1 billion or more in their recent venture capital financing rounds.
A raft of these unicorns are now lined up to follow in Lyft’s wake with their own IPOs. And some of the deals could be much larger. Uber, for example, is expected to file IPO plans in coming weeks valuing it at more than $100 billion. If Airbnb elects to go public in coming months, demand for this dynamic and disruptive lodging firm will also likely be robust.
Lyft’s recent strong debut underscores a key sentiment held by Jackie Kelley, who heads the IPO consulting team at Ernst & Young. She recently told Bloomberg News that “we think this is going to be the best year we’ve seen for IPOs in ages,” adding that the number of firms in registration to go public is unusually large.
Of course, not all hot IPOs pan out, especially once the hype has cooled. Shares of Snap surged 44 percent in their first day of trading in 2017 but have since fallen more than 50 percent. And Lyft on Monday saw its shares smacked down nearly 12 percent on its second day as a publicly traded company, to close at $69. Simply put, buying any hot IPO once it begins trading can be risky.
However, investing in IPOs via an ETF can help mitigate that risk.
“The portfolio approach moderates the risk that a single stock will blow up,” says Kathleen Smith, co-founder of Renaissance Capital. Her firm runs the Renaissance IPO ETF (IPO), which has garnered an 17 percent annual return over the past three years, according to XTF.com, beating the S&P 500 by more than four percentage points per year in that time.
Those kinds of gains don’t merely reflect the desire for IPOs per se, they are also a testament to the kinds of companies that go public. “These firms often offer fast growth in an otherwise slow-growing economy,” says Smith. And don’t discount the fear of missing out on these kind of growth stocks. Early investors in companies such as Google, Amazon, Facebook and others have gone on to reap massive multi-year returns.
While some funds (mostly mutual funds) are able to get shares before an IPO, investors who must wait to buy shares when they begin trading face a clear risk. Simply put, “it can be hard to make money after a sharp one-day pop,” notes Smith.
That’s why the Renaissance IPO ETF, which charges 0.60 percent and has $37 million in assets, takes a wait-and-see approach. Shares of a new issue are only bought after a waiting period. Specifically, five business days must pass after an IPO event for larger new issues (such as Lyft or Uber) to be included in the fund, while smaller IPOs are only added to the fund during a quarterly rebalancing.