How to think about IPOs

Summary: IPOs are designed to maximise excitement at the exact moment when public information is at its weakest, making retail investors vulnerable. While some listings eventually become strong investments, the best opportunities typically emerge after expectations cool and fundamentals assert themselves.

There’s a peculiar ritual that plays out in Indian markets every few weeks. An IPO is announced, and within days, it becomes impossible to escape. Social media lights up, television panels turn breathless and grey-market premiums start circulating like cricket scores. By the time the issue opens, even people who rarely think about investing feel the pull. The fear of missing out is powerful, and the IPO machinery knows how to amplify it.

I’ve watched this cycle repeat often enough to recognise what it really is: a brilliantly engineered moment of maximum pressure coinciding with minimum information. The glossy prospectus runs to hundreds of pages, but clarity is scarce. The pricing has been decided by people who know the business intimately, while retail investors commit based on a story polished for public consumption. Oversubscription numbers flash like validation, but they measure enthusiasm, not value. This imbalance of information is something I have been writing about for two decades.

What makes this even more problematic now is how fundamentally IPOs have changed over the past decade. Where companies once used public offerings primarily to raise money for expansion, today’s IPOs are increasingly exit routes for early backers. When you apply for shares in a typical offering, a substantial portion of your money isn’t building anything – it’s buying out someone who got in earlier and wants out.

There’s a second shift that’s equally significant. The traditional division of labour in capital markets had a certain logic: sophisticated investors would back young companies through their uncertain, loss-making years and only after a business found its footing would it open to the general public. That sequence is breaking down. Companies that haven’t yet figured out how to make money sustainably are coming to the market at prices that assume everything will go right for years. The uncertainty hasn’t vanished; it’s simply been handed to investors less equipped to absorb it.

None of this means IPO-era companies can never become good investments. Some absolutely do. But here’s the counterintuitive truth: the best time to invest in such companies is rarely at the moment of listing. It’s later, after the excitement fades, after quarterly results force reality to confront narrative, after inflated expectations have deflated and the market has assessed what the business actually delivers. Patience, not speed, turns out to be the edge.

This is admittedly an uncomfortable idea. It means sitting out when everyone else seems to be making easy money. But investing has never been about capturing every opportunity; it’s about recognising which opportunities are worth capturing and at what price. The discipline to let an IPO pass you by and revisit the company a year or two later is one of the most underrated skills an investor can develop.

If you’ve followed my writing over the years, you know my view: the IPO game is stacked against retail investors, and they’re better off staying away. I still believe that. But I’ve also come to accept that this belief doesn’t stop people from participating. If they’re going to play regardless, they might have better tools. We’ve been rating mutual funds for decades and stocks for a few years now. It was time to bring that discipline to IPOs. Our new IPO Rating, introduced in this issue, isn’t an endorsement of IPO investing. It’s an attempt to replace grey-market whispers and over-subscription hysteria with a framework grounded in business quality, growth and valuation.

Our cover package this month explores the IPO landscape from multiple angles: how the machinery actually works, how the risks embedded in today’s offerings differ from those of the past. It also offers a framework for identifying IPO-era companies that have moved past the frenzy and are now standing on genuine fundamentals.

For those willing to resist the urgency, there’s a different kind of opportunity waiting. It just requires the one thing the IPO cycle is designed to deny you: time.