From the desk of the CIO: IPO fever reaches new heights

By Bryce Anderson, Senior Portfolio Manager

Key points

• Strong markets continue
• Surge in AI-driven capital raising
• Discipline matters more than ever.

Markets continued their strong run in May, extending a powerful rebound from the March lows. Equity returns have been led by technology, particularly companies benefiting from rapid growth in Artificial Intelligence. This has been especially evident in chipmakers in Korea which have delivered exceptional returns on the back of surging AI spending and lack of chip supply.

This strength has created favourable conditions for companies to raise capital. A number of high-profile initial public offerings (IPOs) are now coming to market, including SpaceX, Anthropic and OpenAI. These are large, fast-growing businesses at the forefront of innovation, and investor interest has understandably been strong. In addition, established companies such as Alphabet and Meta are also raising significant amounts of new capital.

At first glance, the scale of these fundraisings appears substantial, but relative to the size of global equity markets it is not extreme. However, there is an important nuance. IPOs typically involve only a portion of total shares being sold initially. This means further supply can come to market over time as existing shareholders reduce their stakes. As a result, what we are seeing today may be the beginning of a broader increase in equity supply.

For investors, it is helpful to step back and understand how these periods typically unfold. Capital raising reflects a balance between two competing forces: business owners seeking to raise funds at the lowest possible cost to them, and investors aiming to deploy capital at valuations that offer strong long-term returns.

In more normal conditions, this balance is healthy. Capital is allocated efficiently, and opportunities arise across a broad range of businesses. In more difficult periods, such as during the early stages of the COVID-19 crisis in 2020, capital becomes scarce. While this can feel uncomfortable, it often creates some of the best investment opportunities, as prices are lower and terms are more favourable for investors willing to be patient.

By contrast, periods like today – where enthusiasm around new technologies is high—tend to encourage greater capital raising. Investors are more willing to pay higher prices to gain exposure to perceived growth opportunities, and companies respond by issuing new shares at attractive terms for themselves.

This can lead to strong short-term performance but also increases the risk that future returns disappoint if expectations prove too optimistic. This is exactly what happened during the last IPO surge in 2021.

We are seeing early signs of this more optimistic phase emerging again, particularly around Artificial Intelligence and related technologies. These innovations are genuinely important and likely to shape the future economy. However, the key challenge for investors is not identifying exciting themes but determining the right price to pay for exposure to them.

This is where discipline becomes critical. IPOs are not inherently good or bad investments, but they are often launched when investor demand is strongest. That means valuations can already reflect high expectations. Investors who lack the resources or expertise to assess these opportunities carefully may be at risk of overpaying.

Prices today reflect a lot of optimism despite the fast pace of change and extreme uncertainty about how technology will develop and whether the ultimate winners will be today’s dominant businesses, or tomorrow’s consumers that benefit from competition.

In Morningstar portfolios we are favouring other sectors and markets that offer better risk adjusted returns including healthcare, defensive sectors and emerging markets.

IPO fever is when investors get carried away so it is critical to look at both sides of the story and base investment decisions on research, not the sales pitch.

Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in. This document is issued by Morningstar Investment Management Australia Limited (ABN 54 071 808 501, AFS Licence No. 228986) (‘Morningstar’). Morningstar is the Responsible Entity and issuer of interests in the Morningstar investment funds referred to in this report. © Copyright of this document is owned by Morningstar and any related bodies corporate that are involved in the document’s creation. As such the document, or any part of it, should not be copied, reproduced, scanned or embodied in any other document or distributed to another party without the prior written consent of Morningstar. The information provided is for general use only. In compiling this document, Morningstar has relied on information and data supplied by third parties including information providers (such as Standard and Poor’s, MSCI, Barclays, FTSE). Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third parties accept responsibility for any inaccuracy or for investment decisions or any other actions taken by any person on the basis or context of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment or the return of capital. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at morningstarinvestments.com.au/fsg.  Before making any decision about whether to invest in a financial product, individuals should obtain and consider the disclosure document. For a copy of the relevant disclosure document, please contact our Adviser Solutions Team on 02 9276 4550.