Top IPO Scholar on Unprecedented IPO Wave & Why IPOs Underperform the Market | Jay Ritter

Episode Summary

Executive Summary: Jay Ritter argues the current mega-IPO wave is historically large in nominal and inflation-adjusted terms, driven by AI leaders like SpaceX, OpenAI, and Anthropic. He says valuations can be justified for some revenue-rich tech firms, but very high price-to-sales multiples imply low expected returns and greater risk. He also warns that private-market capital is crowded, illiquidity premiums may be shrinking, and more retail exposure could force better price discovery and tighter oversight.

Main Topics: Historic scale of the new mega-IPOs (Priority: 5/5): The conversation opens with whether the current IPO wave is unprecedented. Ritter says it is historic even after inflation adjustments, with SpaceX potentially the largest IPO ever and OpenAI/Anthropic likely ranking near the top. Valuation discipline and high price-to-sales risk (Priority: 5/5): Ritter distinguishes between large revenue companies that are often priced reasonably and companies like SpaceX that debut at extremely high sales multiples. He argues that very high valuations require many things to go right and historically underperform on average. AI optimism versus pricing realism (Priority: 5/5): The discussion centers on how AI is genuinely transformative, but that does not mean every AI-related asset is a good investment. Ritter repeatedly notes that excitement about the technology does not answer the key question: what is the right price? Private markets, VC/PE returns, and reduced illiquidity premium (Priority: 4/5): Ritter says venture capital and private equity have seen large inflows, pushing up prices and likely compressing expected returns and illiquidity premiums. He rejects the idea of a free lunch for investors moving into these assets later. Regulation, disruption, and geopolitical competition (Priority: 4/5): The interview explores how AI’s disruptive effects, unintended consequences, and dual-use national-security dimensions increase pressure for regulation. Ritter emphasizes the challenge of regulating without stifling productivity or falling behind China. Market structure changes and price discovery in private assets (Priority: 4/5): The discussion ends with the possibility that perpetual futures or other instruments for unlisted companies could make private valuations more transparent, reducing stale pricing and increasing pressure on VCs and PE funds to mark to market.

Key Arguments: The current IPO cycle is historically large even after inflation adjustment, with SpaceX surpassing prior record IPOs. Big, revenue-generating IPOs tend to be priced more accurately on average than small speculative IPOs because institutional investors can compare them to public peers. Companies going public at extremely high price-to-sales ratios have historically underperformed, so SpaceX’s valuation is especially risky despite strong businesses. AI is likely to create enormous consumer and productivity benefits, but the gains will mostly accrue to users and workers, not necessarily capital owners. The main beneficiaries of technological change are often society at large, while investors in the most celebrated companies may still face mediocre returns if valuations are too high. AI regulation is hard because the risks are real, but overly restrictive rules could slow innovation while other countries, especially China, continue advancing. Private equity and venture capital have likely absorbed so much money that expected returns and illiquidity premiums are now much lower than in the past. Retail access to private assets through funds or derivatives may increase pressure for transparent pricing, but it also introduces fee layers, adverse selection, and fraud risk. Stale pricing in private markets can create volatility washing, making risky assets appear smoother and more attractive than they really are. The public market is increasingly the venue for the proven winners, because companies stay private longer and weaker firms are often acquired or never go public. Sentiment matters in IPO markets, but it is usually built on real fundamentals; the hard part is determining where optimism becomes overvaluation.

Data Points: Largest IPO previously: Saudi Aramco raised about $29 billion - World's largest IPO in nominal terms before the current wave. Largest inflation-adjusted IPO before SpaceX: NTT IPO in 1987 at about $45 billion (inflation-adjusted) - Japan privatization deal that had held the historic record. SpaceX IPO size relative to prior record: Approximately twice as big - Ritter says SpaceX far exceeds the previous inflation-adjusted record. Potential ranking of AI IPOs: SpaceX likely #1; Anthropic and OpenAI likely #2 and #3 - If all three go public, they would be the largest IPOs in history. U.S. IPOs in 2021: 311 operating companies - Ritter contrasts current issuance volume with the 2021 boom. Revenue threshold for better IPO outcomes: At least $100 million annual revenue - Companies above this inflation-adjusted sales threshold tend not to underperform on average. SpaceX price-to-sales ratio: Over 90 - Ritter cites this as a historically extreme valuation level. Implied profits at $2 trillion valuation: About $100 billion annual after-tax profits at P/E of 20 - Illustrates the scale of earnings needed to justify SpaceX’s valuation. Life sciences share of IPOs: About 30% of IPOs from 2013 to 2022 - Used as an exception where many firms went public with no product revenue. Dual-use / national interest example: Boeing and Anduril - Examples of companies with civilian and military applications. AQL-style volatility washing example: Private real estate funds often report smoother returns than REITs - Used to show how stale pricing can hide risk in private markets. Public market leverage to mark private assets: Daily NAV for mutual funds - Explains why retail-facing products may face more pressure to use current marks.

Pivotal Quotes: "There are very good reasons to be really excited about AI. But what's the right price?" — Jay Ritter: Summarizing his view that technological promise does not justify any valuation. "When you buy high, expected returns are lower. And I don't see any reason to think that a free lunch is sitting there." — Jay Ritter: His broad warning about venture capital, private equity, and high-priced IPOs. "The main beneficiaries are going to wind up flowing to us humans and our role as consumers." — Jay Ritter: On how technological change tends to benefit society more than investors.

Implications: Listeners should separate excitement about AI and mega-IPOs from valuation discipline. The biggest winners may be society and consumers, while investors face lower returns if they chase crowded private or public prices. Greater retail access could also force more transparent pricing and oversight.