The IPO fever has just begun. At least, that is what the success of the Lenskart IPO seems to be suggesting. We have a steady supply of IPOs coming at us for the next few months. The monies being raised could be anywhere between ₹1,00,000 crore and ₹2,00,000 crore. The appetite prevailing now for IPOs is something we have never seen before.
In fact, there is an even higher appetite to buy shares in companies that are going in for IPOs over the next six months. The pre-IPO boom is getting further boosted by the very liquid nature of the cap table of several companies. Early-stage investors and even promoters are more than willing to dilute at the pre-IPO stage itself. What does this current IPO-centric boom tell you?
It clearly shows that the need to just participate is far higher than the need to invest at favorable valuations. The general belief is that valuations will remain elevated, and therefore, it is the new normal to buy expensive companies. Clearly, the post-COVID boom driven by liquidity continues to influence the investment behavior of most investors who entered the market in the last five years.
The approach of family offices in this situation is far more cavalier and aggressive than that of retail investors. This shows that big money’s risk-taking is far higher than that of retail money. The lack of adequate opportunities at favorable valuations is making those with greater compulsion to deploy more capital take higher risks. But this approach has not played out successfully over the long term for anyone.
Valuations will always remain the guardrail of sensible investing. If opportunities aren’t coming one’s way, then the right response would be to wait for the right opportunity. Running behind the best among available opportunities is clearly a function of acute FOMO (fear of missing out).
The fundamental flaw is that one tends to ignore valuation excesses in the belief that the excessive demand for equity in good companies and the lack of adequate liquidity in such companies will always sustain the prevailing overvaluations. Irrational exuberance is never permanent. This is a good time to remind oneself of this universal truth.
What should an investor do now? Should he sit out of the entire IPO boom or should he participate like he does in a lottery? Buying in an IPO and selling on a listing pop is not a sustainable playbook in the stock market. It would be good to remember that just one big fat issue’s failure will end the whole trade, leaving you stuck holding expensive stocks for years on end.