Mundy: What are the risks of investing in IPOs?

IPO RISKS

We are sometimes asked whether we participate in new issues (IPOs).

Historically, it is an area where we have little exposure; mainly because of our strong views on the subject. The academic evidence on the long-term successes of IPOs is, to be generous, mixed. For example, a study of 5,821 IPOs highlighted by Loughran and Ritter in Investment Fables by Aswath Damodaran, calculated that IPO firms underperformed peers by high single digits per annum for up to four years. The odds appear to be against the long-term investor in IPOs. The company selling its shares picks the time to sell, which suggests it has an inherent advantage over the buyer. In additio...