How to Invest in All These New Public Companies

what they are. What's interesting about I p o s when it comes to E t s is that most e t f s are based on these indexes from M S, C I and foot see and S and P and people don't maybe realize that it takes a couple of years for an ip O to get big enough of UH and pass the tests and screens of these indexes. So most people do not own new I p o s in their E t s. Most people could be happy about that. However, there's a group of e t F s I call them catch and release.

They pick up new I p os when they first come out, and they release them between two and four years. So this is trying to catch them in that early stage. And if you look at the performance, especially the one that's bet fifteen years old, it's it's great. It's kind of one of the more underrated areas in my opinion, because most people don't have exposure. It's adding unique exposure. The performance is good, and so we've written about a little bit and Caroline and Wilson from Bloomberg News has

been covering it a lot lately. And you know, a lot of I p o s flame out and they give the rest a bad name. But there's a couple that are so good that they really canceled out a lot of those, and that's uh, you know, I think the story we want to delve into today. Also joining us is your boss, Gina Martin Adams at Bloomberg Intelligence. I gotta be on my best behavior today. No, um, yeah, No, I'm excited because Gina is the equity strategist mastermind of

Bloomberg Intelligence. She leads all the research um of our team, which is now Equity Strategy E T S and E S G. We're kind of like all the everything that's not stocks and bonds, and so Gina leads that up and I'm working for her handling them side of it. This time, I'm Trillions I p O Season, Carolina, Gina, Welcome to Trillions. Thank you. So how significant is the number of I p o S we've seen so far here?

Today compared to a couple of the past years. UM, it's higher than it has been recently, but not as high as other spikes so far this cycle, and nowhere near the big IPO boom that we had in the so depends on your perspective. April was the biggest month for IPO issueance, both in terms of deals and value since what happened in twelve Facebook ipoed. The other big spike was very early in the cycle when GM came

back on the market. So it's been a big year relative to the last several but not as big as other years in this cycle. UM, and April was notable, but the I p O market has slowed a lot since April as well, so we've got a little bit of a drag here into the summer. One of the things that's been sort of interesting, though, has been type of company that's been coming public because they've been private

a much longer period of time. And I'm, you know, first and foremost in that camp is uber and left right. How has that impacted sort of what we're what we're watching during this sort of IPO moment. Yeah, it's a good question. I think that there has to be a certain degree of desperation for capital to come into the equity market anymore. And the way that I think about this is as a company, your access to capital is uh in many ways, much much better than ever before

in history. Liquidity is ample, there's cash everywhere. Private equity companies have a ton of funding. VC crowdfunding is huge. So to come to the equity market you have to come already in a very very high stature because it's extremely expensive relative to the other sources of funding. And so what we're finding is the companies that are coming to market are generally much much bigger. They've established some

degree of track record. I think the other thing that is probably under appreciated is the investor is extremely discerning, especially relative to twenty years ago, when anybody who came to market was like, Yeah, it's a new stock, we want it. Today, nobody wants stock stocks or the redheaded stepchild in the st class universe. Especially nobody wants US stocks, even though they've outperformed and they've driven tremendous games over

the gains over the cycle. There's just not a lot of demand for shares, and so companies have to come to the market ready to face that they have to be ready to push their story to an investor that is highly skeptical relative to the investor of the past, and they have to come bigger because their access to funding is is very different than it has been in the past. I think it's just a different kind of

I p o uh. Companies aren't even following on with equity issuance, right, It's just nobody wants to use equity markets when dead is so very very cheap and private capital is so cheap that no, it's interesting. This is why I love going to Gina for big picture or five A theory. She sometimes will give me perspective or just straight out like stomp on it. We have we have very healthy arguments on our team. Um. I feel like that was a pretty great rain cloud to put

over public markets. Yeah. I'll only counter that with I think if you look at equity flows and you net them all out, obviously a lot out of active equity mutual funds, but a lot of money has been going into sort of like general Vanguard SMP funds. So if you've been doing that, you have been doing great. Um. But yeah, I think the equity markets tend to be um something that people are still a little shattered by from two thousand eight still. But let's shift to the

E t F a little bit. So we just went over the story here with the I p O season getting going, and they get a lot of press. I think that's why we tend to think there's a lot of them. Um, Carolina, just talk about your foray into looking at I p o E t F s and what you learned. Sure, so there are two that come to mind. Is sort of the biggest in the space. And back to your point that indexes will like drag their feet when it comes to including new companies in there.

I mean just the sat Gina mentioned Facebook it too. It took two years before Facebook was added to the SMP. Isn't that nuts? So these et fs do provide a sort of pocket to invest in this market before, like Eric was saying, you can get it in any other sort of normal indexed products. So the two big funds in the space, you have the renaissance I p O E t F. It's known by its ticker I p O. I would say this is like the purer I p O E t F of the two, and I'll explain why.

But it will typically include new new companies that scheduled quarterly reviews. It can buy shares of the newly listed companies with at least a hundred million in market cap, though as soon as five days after the I p O. So it bought Uber about seven trading days after its ip O back in May, and it right now holds

Uber obviously, Lift Zoom, Pinterest beyond Me. Its biggest holding currently is Spotify, and then you have the bigger but I would say less obvious I p O E t F. It's about a billion dollars in a u M. It's the first try US Equity Opportunities E t F. And it doesn't sound like an I p O E t F right, And if you look at the whole things, it doesn't look like an I p O E t F F p X. Yeah, it does not sound like

it's rough. It's rough. Um. So if you look at the holdings of this, there's only one I p O right, right. They should use something better, and I would say call it new or something. But because they had spinoffs, I don't know. There's probably a better ticker out there. But First Trust is a pretty like I don't know that they're not crazy ticker kind of company. So fp X, what do you what do you see? So you'll see PayPal, Verizon, Hershey. Can anyone guess when Hershey I p O n Gina

no idea seven. They just inverted the numbers. That's actually that might be before the Dow Jones Index. Isn't that around the same time. But to your point, because the CPS, this E t F will include spinoffs or firms that are acquired by a company that went public within the preceding four years. So like her she bought Amplify snack brands in the beginning of even if it gobbles up something a new IPO, yeah, it'll be included in there. So some people will say, you're getting exposure, right, are

you diluting the I p O effect? They will first trust will say, but maybe we're providing more diversification or cushion because I p O s are very volatile, so that's sort of the landscape. So how they performed. So I p O the renaissance E t F is up close to one year to date, f p X is up. So I do see the dilusion there with that I p O effect we were talking about, and the SMP is up close to so I p O is almost

double the returns of the SMP this year. Let me jump in here on the performance issue, because fp X, if you go back to when it was accepted in two thousand and six, there aren't many e t s that have like fifteen year track record. Basically, it's up three hundred and forty five. The SMP is up two hundred and eight percent, and so that's through through two thousand and eight and all, and you know, the the

Great Financial crisis, that's a hundred and our performance. If this were an active mutual fund, this would be the cover of Forbes, the cover of Fortune. It's it's got a billion, which isn't bad, but I'm kind of shocked that it just works. And you looked at Facebook. You talked about that it didn't go to the indexes until the second year. Facebook was up it's first two years. And if you look at the of that performance, of

the contribution to that return was Facebook alone. Facebook. And if you look at the ones that didn't do well, they didn't do well, but they didn't do as bad as Facebook did good. So there was a couple just total studs that totally offset the duds, and I think that's the secret sauce here. That's what what do you what do you attribute to performance to the studs are bigger than the duds are bad. You just need a couple giant home runs and it seems to make up

for some of the crappier ones. When you look at I p O, what do you see there? So I p O is up over year to date, and the f p X E t F is up, so a little less but still more than the SMP, which is up about And a note on when these E t F s will get rid of those new I p O s right, because they'll obviously sort of switch out their holding. So I p O I believe after two years it will kick out those companies because that's around the time that these companies start getting integrated into new indexes.

And I think fp X will hold them up to four years. Yeah. I used to call them catching them during the toddler years, but as Gina mentioned, they're not toddlers when they hit the market anymore. They're they're like almost grown adults. But you are getting the teenagers, yeah you are, but you are getting them with some growth spurts and Gina, I'd like to point this to you because when I was writing my note on I P O E T S, I don't know a year ago or so, I kind of brought it to you, like,

am I missing anything here? So I ask you, just as a personal investor, is there anything that would give you pause before buying something like F p X or I P O, Like what could go wrong here? Well? I think you can go through phases right. So typically, if you're thinking about the long term cycle, the peaks of ICE I p O issuance tend to be right at the end of the cycle. They tend to be the two thousand sevenths of the world, the two thousands of the world. So that um part of it is confidence.

Companies are pretty good at assessing when they're going to get the best value out of it, right. If you're if you're issuing stock at peak valuations, you're probably going to get a lot of capital relative to if you're issuing stock at very low valuations, you're not getting a lot out of it, right, So they're pretty good at timing as as markets go higher. Also, it's just a business cycle thing. It's confidence at the peak of the

business cycle, activity is very very robust. Everybody's excited about the prospects for equities. Generally, confidence is very very high, so you're feeling great about the about the likely outlook. The market reception is typically better. Um. You know, people generally during big I p O booms, you get better bet better returns to those I pos in the immediate after issuance period then earlier in the cycle where there's

much more skepticism. So I think you can get caught in a trap of market timing to some degree with I p O s, though the historical evidence is irrefutable. Over the long term, you're getting the companies generally earlier in their life cycle, and your returns are going to be better. I mean, it's very similar to the small the capitalization effect. Normally, if you're buying smaller in mid cap stocks, you're going to get better longer term returns.

You're taking a lot more risk, but your return should be better as well, and I think that that's get that gets reflected in these sort of style et F that we're discussing. I was chatting with Kathleen Smith, who runs the I p O E t F, and it's interesting we were saying how investing in I pos is

like very emotional, right, It's about the emotion. And so she talks of financial advisors who are trying to get their clients to asset allocate, and they'll call them and be like, get me shares of Uber and they're like, no, we don't want to do that. But she argues, this is where an E t F can step in and it can be here. This is a safer way to ride this I p O wave without loading up on shares of Uber well, and you're also diversified across ibas IPA.

So to Eric's earlier point about the studs and the duds, your media in return for ips this year isn't great, but you have big, big companies with much stronger returns like Beyond Meat that are overwhelming some of the dogs that have come out so far this year, and that

produces much stronger returns. When you have a basket, I think your average investor would really have a hard time accessing that basket, and they might pick emotionally the Uber because they're familiar with it and miss out on opportunities are a broader array of options with with the I p O E t F. How does she pick which one she buys and which one she doesn't buy. Does she pass on stuff? She has a rules based index. It's a rules based index, so I p O will

follow that. But for example, I thought it was interesting that fp X bought Lift, but it was waiting until the next quarterly review to add Uber because they claim that, well, this is the first you know, uh right, sharing stock to market, So we're gonna buy that, but we're gonna wait on Uber. But there are a lot of analysts point out a lot of differences between Lift and Uber, so I know that Cathy sort of said has had

some bones to pick with that. You know, you shouldn't be able to choose that specifically if it's a rules based index and it just gets at it in That is exactly why passive really isn't passive. I mean even the S ANDP has got a committee. I mean, it's all the wiring in these things is all human. It's very active, and you can see the returns could really deviate based on that little decision difference between I PO and fp X. That's why I should have some job

security going forward. So what is something that she's passed on so far this year? Based on her rules. I don't think anything. I mean seeing the holdings, I think whole. I think I PO holds all of the so far this year. It depends a lot on the side. So I think there have been a lot of biotech IPOs market, but they've been smaller, so they're going to have now. One thing we do see is the first day of the I p O. There's like all this fanfare. A lot of times there's a little drop after there's some

and that's when the press really gets angry. Um. Can you talk about the fact that there is a little delay in the when the E t F picks it up. It doesn't pick it up on the day it's born, so to speak. It waits a couple of days by design. Can you go over that? So I think FPX can actually pick it up after the first trading day. Normally they will not. Um, Like I said, it will be about five trading days for I p O to pick it up. And I think they're waiting for a certain amount.

But I think they want the volatility to the game. The people who bought it just to sell it on day one. And you know how much of that is going on? How much of these these bankers, these you know, Wall Street bankers who are sort of have their hands in this I p O and they're just waiting to like dump it to the dumb money, so to speak. And what's that process like? Yeah, I know, I don't know if I have a tome a visibility into that.

I think there's a whole, you know, whole trading operations built around I p o s that I don't have a great degree of visibility into. But there definitely is um a whole cottage industry in trading I p o s. I mean, even individual retail investors can get really into I p o s trying to figure out how to time the purchase and then dump of these companies, anticipating

that there will be extraordinary optimism. And I think that's frankly a legacy of the nineties experience, which is interesting because here we are, I don't even want to mention how many decades later from the nineties. Nonetheless, in the nineties, the experience was very precisely. I p o s are

always greeted very very kindly by the market. It's a much different climate now, and it's a lot harder to trade these entities Nonetheless, there are still whole trading shops set up around and operations set up around gaming the IPO system. So one thing that has changed since the nineties is that there's this other way to go public now, which is direct listing, which we just saw with slack

in a year ago. We saw it with Spotify, which even if it's a direct listing, I guess and I take her with the IPO can actually still do it right because it's just a you know, when you go public. But Gina, when you look at direct listings and and think about I p O s, what's changing with this new sort of flavor. Yeah, I think some of it's The marketing machine is very different. Technology has obviously forced

this to happen back in ancient times. Um. You know, when I was starting in my career, you only I p O through an investment bank because that was the machine by which your shares ultimately got to the final consumer. That machine is very different now. You don't necessarily need an investment bank to market your company, to market your shares, to just describe the value to the average broker. And that's a function of technology and communication more than anything. Um,

it's also a function of cost. Again we talked earlier. When money is cheap and easy, it changes the game. And it's changed the game from you know, having to pay extraordinary fees to a big investment bank to help you list too much much lower fees over time, and now direct listing. So it's just it's comprehensively a very different climate than I think many of us you know, who have grown up in this business, no of the I P O industry. And should we expect to see

more of this new machine? I think so. I think overall you're seeing this across the board. The one thing that we could really change the game is interest rates start to rise again, right. I mean, there's one big macro trend that has dominated everything for the last thirty years, and that is a persistent decline in in the cost of funds on the debt side, especially UM and and that has really changed access to capital liquidity. The other

thing that obviously has contributed to this is technology. The development of technology, the sort of driving communication process enabling access to individuals that didn't have access before. I mean, the development of the et F industry fits right in to this theme, right, Um, So those two things should they shift, could really shift the game, but it's difficult to make a case for either of those two fundamentals

changing anytime soon. I also want to talk about um Besides I p O e t S, which i'd considered niche, another niche type of e TF is theme ETFs, like the global X social media e t F S so c L. I remember back when Facebook was I pong. It dominated the news for like six months, and that's when I really looked as it went down, just that

it was coming out. Facebook, to me, probably was the biggest I PO that I can remember having to cover as an e t F analysts, and everybody wanted to know which e t F s and when, and I remember at the time um fp X was one on the table, but believe it or not, the first one to add it was s o c L, which was the social media e t F A lot of Here's the point is that that's good, right If you have a social media e t F and you don't have Facebook fast, you're like, what am I doing here? Right?

So I think the niche e t F s are aggressive and a little unconventional on purpose, and that's probably good. But you should know that like some people just may not want something so aggressive. So it's not just I p O E t f s, it's thematic ETFs in

the industry. It's tracking that you could end up with new I p o s very quickly because they tend to have a more liberal wiring than the more traditional sector E t F s. So one related question to these I p O E t f s. I would think that they would appeal to retail investors, but who's actually using them? Is this? Do you see when you guys look at the numbers, are institutions in them in a big way? Or or do you see that there's

a lot of retail there. So the big institutional clients they're the pros, right, And I asked Kathleen, I mean, if it's the job of these big active managers or bigger institutional clients to do the research and pick these single stock names, will they really use your E t F? And something interesting that she said, actually in June the I p O E t F started listing. It has listed options now, which will attract the more sort of

tactical clients. I mean, sure the liquidity there is is less, but you know, now a hedge fund could take the other side of this trade. If they on it too, it looks like fp X, right, that's the bigger one with a billion. About half of it is definitely retail because only shows up in thet You do have some like Raymond James, so some advisor networks on it. Um. It's kind of about what I thought. I don't really

see any big institutional money like pensions or endowments. They're probably buying IPOs on their own with the manager, either external or internal. But I think for advisors or retail it's good. And again, you know, the beauty of E t F s is uh, if you're lazy, I mean, this thing does all the hard work. You don't have

to watch the news. You don't have the care. It's just gonna suck up the new I p O s, hold them, try to squeeze out that juice and then let them go, and you just don't have to really lift a finger. But there are people who track it, like Gina was talking about, even day traders. Um. The whole point, if you're researching this stuff, you would never use the e t F and I think the institutional

market would probably fall in that camp. In this case, Gina, would you rather as this is all presented, do you think you would do better just tracking them all in the FPX style, were trying to game it and pick it through an active stock picker, Like, how do you

think that would work out? For me? And I think the average investor, I'm I fall in the lazy category right, So for me, the diversification benefit of the basket is is far in a way, much much more appealing and attractive than trying to do the legwork to find that individual, you know, nugget of gold in this in a whole pile of sand, because I just don't know that every individual has that level of because fertise, yes, if you're

an institutional and analyst dedicated to that industry, you presumably should be able to pick the winner. But every one of us has their own area of specialization. Minus Macro, I have no idea what these companies do. For the most part, I'm not going to spend an inordinate amount of my time on the weekend trying to figure out which one of these companies is going to be the big winner. Instead, I've definitely fall into the lazy category.

I'd much rather have the basket, especially give the proven returns I also just don't have the risk tolerance, frankly, to take on single name exposure at such a minute level. It's just it's just not within my DNA. I want to bring this up because if you are gaming in time, I remember the Uber IPO. I think you even wrote an article saying, Hey, your ETF is gonna own it.

It's Isn't that not good? Um? I look, I went back and I googled like Facebook I p O. It was almost it echoed what people were saying about Uber, and Facebook turned out to be the stud of all studs. So I do think there's this like pylon like negativity, and if you are active, that emotion could really influence your decision. And I could see not have stucking with Facebook after the I p O. Whereas the index is dumb,

it just does it because it's like a robot. I'm old enough to remember the Google I p O. Not that I want to age myself here, but I can remember being on the desk and all of the skepticism around where Google was going to go, Right, what is this company? Is the search engine? They never of one of those you, Oh, why would you ever want to

touch this? It's funny now there's like and people rightly so trash it is CNBC in particular, they'll put these tweets out saying if you had bought Google at the I P O and with ten thou dollars, you would have eight million dollars or something, and they kind of rub it in your face. Um, and then on the flip side they trash new I p O s. So

I'm saying there's a disconnect here. If you're going to trash every new I p O and jump on the bandwagon of hating, then why would you go back and pick the winner and do this sort of like rubbing your nose in it that you didn't buy it. I think the media has like real mixed signals on that in my opinion. Yeah, it's also legacy. I mean, it's the pendulum just swaying from one end of the spectrum

to the other. It was every I p O. I'm telling you, in the late ninety nineties, every ip O that came to market was the God's gift to the investment universe. Yeah, I gotta have it. You can't have it enough. And then when all of those, many of those, not all of those, but when on many of those failed and ultimately just you know, weren't e and companies anymore. It really changed the investor psychology towards I p o s and we've been fighting that battle of skepticism ever since.

We talked about I p o s. We talked about how they wait longer. Um, it's more expensive. This taps into what you hear more about, which less companies going public? Um, can you talk about I p o s in the public market versus the growing private market? And how should a retail investor deal with being shut out of the private side and how much is that going to grow in proportion to public going forward. Uh, it's a really

good question. I don't know that I have a very clear crystal ball on how much private versus public will grow, but I do think that there are a couple of things to know. The first is the companies themselves are incentivized to stay private longer because of their access to capital in liquidity, so that that would have to shift. UM.

A couple of things are happening that could create a shift. UM. One is if economic growth starts to accelerate much more rapidly and sentiments starts to improve towards the investibility of public assets. It could make issuing your stock on public markets much cheaper and that would improve that, you know, incentive. The second thing that I think is really important to

watch his tax policy. We've been an environment for many, many years where companies have been incentivized to utilize debt because they can write off the interest expense on that debt. They can't do that with equity. Well, as a component of tax reform, companies are now limited with with respect to the amount of interest expense they can write off, and they'll be even more limited starting in two if

you can make a case for two. They're more limited from utilizing debt markets UM, which you know, any company can access debt markets. You don't have to be a publicly issued company in the SMP five hundred to get access to corporate capital, right. So that's part of the story is it's not just private it's also public debt

markets that companies can issue it UM. And that's the bigger story, frankly, because if suddenly you start to see the text incentive eliminated and rates go much much higher, companies will be forced to consider other ways of funding themselves, equity being the other choice, but back to your original question, which I've veered off of not intentionally. Um. In terms of the private markets, I don't see that changing a whole lot, because a lot of what's happening in the

private markets is technology based. It's being able to fund through crowd right, it's being able to fund UH in alternative ways that are much cheaper, and it's created it's it's at its core a function of the fact that we have access to this via technology. Right as an individual retail investor, I can go online and search I'd like to get into a crowdfunding organization now that didn't

exist ten years ago. It's a totally different landscape. I think that also sort of calls into question whether bringing it back to the E t F side, these strategies can be used as a proxy for the health of the I p O market, Right, So we look at the bud Wiser deal that didn't get done, it would have been I think the biggest I p O this year. You know, do people chicken out because they can say the health of the I p O market isn't great

right now? Or could we now look at these strategy strategies and be like, well, look at the c t F. That's up, you know, can you really hide behind that excuse anymore? And just to one more thing is that there are some e t f that use private equity in the name to give you a feeling that you're buying into private. You cannot use an et F for private Just to let you know, these e t f s tend to look at small and micro caps that have private equity like traits. It's, in my opinion that's

kind of faulty advertising. Um, but what about VC? Are there VC e t s yet? No, they just call them private equity. There. Now, there is a private equity the trucks public stocks that invest in private equity, but even that's very diluted. You're you're you're really stretching there. So when we write about private equit, we we we pretty much say like, um, you know, just forget about it. Um. The e t s just there's some places the e t F just can't go. Last thought, Gina, it's that

part of the year, midyear moment where there's vows. So if you want to talk about Eric latter, Carolyn, Gina, thanks very much for joining us on Trillions. Thanks for listening to Trillions. Until next time. You can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcast, Spotify, and wherever else you like to listen. We'd love to hear from you. We're on Twitter, I'm at Joel Weber Show.

He's at Eric Faull Tunas. You can find Gina Martin Adams at Gina Martin Adams and Carolina Wilson at Caro E. Wilson. Trillions is produced by Magnus Hendrickson. Francesca Leady is the head of Bloomberg Podcast by