Should You Invest in an IPO? : Aura Solution Company Limited

A Long-Term Perspective

The return of high-profile public offerings has once again captured global investor attention. With companies such as SpaceX entering public markets and several other private technology leaders expected to follow, many investors are asking the same question: Should I buy the IPO?

The excitement surrounding an initial public offering is understandable. IPOs often dominate headlines, generate extraordinary demand, and create the impression that the greatest investment opportunities exist only on the first day of trading. Yet decades of academic research and market experience tell a far more nuanced story.At Aura Solution Company Limited, we believe successful investing is built on discipline, valuation, and patience—not market excitement.

Key Insights

Institutional Investors Capture the Largest IPO Gains

One of the most common misconceptions surrounding initial public offerings is that every investor has an equal opportunity to benefit from the dramatic price appreciation often witnessed on the first day of trading. In reality, the largest and most immediate gains are typically realized long before ordinary investors are able to purchase shares.Before an IPO begins trading on a public exchange, investment banks allocate shares to a select group of institutional investors, including pension funds, sovereign wealth funds, mutual funds, insurance companies, family offices, and long-standing institutional clients. These investors purchase shares at the official offering price established during the book-building process.

Once public trading begins, market demand frequently drives the share price significantly above the offering price within minutes. While headlines often celebrate the spectacular first-day return, that appreciation largely belongs to investors who received allocations before the market opened.Retail investors, by contrast, usually purchase shares after this initial price adjustment has already occurred, meaning much of the early return has already been captured by institutional participants.This structural feature of the IPO market explains why headline returns often appear considerably more attractive than the experience of the average investor.

Successful investing should therefore not be measured by whether one participates in the first trading session, but by whether one owns exceptional businesses over many years.

Many Newly Listed Companies Underperform the Broader Market

The excitement surrounding an IPO frequently creates the perception that newly public companies will continue delivering exceptional returns long after listing. However, decades of academic research present a more balanced conclusion.Numerous studies have shown that many IPOs underperform comparable publicly listed companies over the three to five years following their debut.

Several factors contribute to this pattern.

Companies generally choose to enter public markets during periods when investor confidence is strong, capital is readily available, and market valuations are favorable. Existing shareholders—including founders, venture capital firms, private equity investors, and early backers—naturally seek to maximize the value of their investment when selling shares to the public.

As a result, IPO pricing often reflects optimistic expectations regarding future growth.

While many newly listed businesses continue to grow successfully, their share prices have already incorporated much of that anticipated growth. Even strong operational performance may therefore produce only modest shareholder returns if expectations were excessively optimistic at the time of listing.

This illustrates an essential principle of investing:

A great company purchased at an excessive valuation can produce disappointing returns, while a good company acquired at a reasonable valuation may generate superior long-term performance.The distinction between business quality and investment value remains one of the most important concepts in successful capital allocation.

Patience Often Creates Better Investment Opportunities

Financial markets are frequently driven by emotion during high-profile IPOs.Media attention, analyst enthusiasm, social media discussion, and fear of missing out often combine to create extraordinary demand during the first weeks of public trading. Prices may temporarily exceed levels justified by underlying fundamentals as investors compete to establish positions immediately after listing.

History suggests that this enthusiasm rarely persists indefinitely.

As quarterly earnings become available, analysts develop more realistic expectations, and early investors become eligible to sell shares following lock-up expirations, market pricing often becomes increasingly aligned with the company's intrinsic value.For disciplined investors, these periods frequently present more attractive entry points than purchasing amid the excitement surrounding the initial listing.

Waiting several months does not necessarily mean sacrificing opportunity.

Instead, patience often provides investors with additional financial information, improved transparency, greater market liquidity, and a more rational valuation framework from which to make long-term investment decisions.

• The objective should never be to purchase a stock first.

• The objective should be to purchase it wisely.

Exceptional Businesses Are Not Always Exceptional Investments at Every Price

Perhaps the most important lesson in investing is understanding the difference between a great company and a great investment.

These two concepts are closely related—but they are not identical.

Many of the world's most successful companies possess extraordinary management teams, durable competitive advantages, global brands, exceptional profitability, and decades of growth potential. Businesses such as Microsoft, Apple, Alphabet, Amazon, NVIDIA, and numerous others have fundamentally transformed industries while creating enormous shareholder wealth.

• Yet even companies of exceptional quality can become poor investments when purchased at excessively optimistic valuations.

• Investment returns are determined not only by the quality of the business but also by the price paid to acquire ownership.

• Paying too much for even the finest company reduces future return potential because much of the expected success has already been reflected in the share price.

• Conversely, purchasing exceptional businesses during periods of temporary uncertainty or market pessimism often creates opportunities for superior long-term returns.

• This philosophy has guided many of history's most successful investors.

The goal is not simply to identify outstanding companies.

The goal is to acquire ownership in outstanding companies at valuations that provide a meaningful margin of safety and the potential for sustainable long-term capital appreciation.At Aura Solution Company Limited, we believe disciplined investing requires balancing enthusiasm with valuation, conviction with patience, and opportunity with prudence. Markets will always create excitement around new listings, but enduring wealth has rarely been built by chasing headlines. Instead, it has been built by consistently owning exceptional businesses, purchased at sensible prices, and allowing time—not speculation—to compound value.

Lesson One: The Best IPO Returns Rarely Reach the Public

Historically, newly listed companies have produced impressive first-day gains. Research conducted by Professor Jay Ritter of the University of Florida shows that U.S. IPOs have generated average first-day returns approaching 20% over several decades, with certain market cycles producing significantly higher gains.

• However, these headline figures can be misleading.

The majority of those initial profits belong to institutional investors who receive allocations directly from the underwriting banks before shares begin trading publicly. Retail investors typically purchase shares only after prices have already adjusted upward, leaving much of the immediate upside unavailable.

Academic research has long described this phenomenon as the "winner's curse." Highly sought-after IPOs receive limited allocations, while less attractive offerings are often widely available. As a result, simply subscribing to every IPO rarely produces the returns implied by historical averages.

Successful investing is not about winning the first trading session—it is about owning outstanding businesses over many years.

Lesson Two: Initial Excitement Often Gives Way to Reality

While IPOs frequently enjoy strong early trading, numerous long-term studies suggest that many newly public companies underperform comparable listed businesses over subsequent years.Research by Jay Ritter and Tim Loughran demonstrates that companies issuing new equity—including IPOs and secondary offerings—have historically lagged comparable firms over extended periods.

Several factors explain this pattern.

Companies often choose to go public when investor optimism is elevated, industry valuations are attractive, and capital is abundant. Existing shareholders naturally seek to maximize value at the time of sale, meaning IPO pricing frequently reflects optimistic expectations rather than conservative valuations.

This does not imply every IPO is overpriced. Many world-class businesses entered public markets through successful IPOs. However, history consistently shows that purchasing exceptional companies at excessive valuations can still produce disappointing investment outcomes.

Lesson Three: Lock-Up Expirations Can Create Better Entry Opportunities

Most IPOs include lock-up agreements that prevent company founders, executives, and early investors from selling their shares for a predetermined period following the listing.Once these restrictions expire, a significant increase in tradable shares often enters the market. Numerous academic studies have documented that share prices frequently experience downward pressure during these periods as additional supply becomes available.

Although the timing of lock-up expirations is publicly known, markets often react to the increased selling activity when it actually occurs.

For patient investors, these periods may provide more attractive opportunities than purchasing during the initial enthusiasm surrounding the IPO itself.

Should Investors Avoid IPOs?

Absolutely not.

Every great publicly traded company—from Microsoft to Amazon—was once an IPO.Research by Professor Hendrik Bessembinder reveals an important reality about equity investing: only a very small percentage of publicly listed companies have generated the overwhelming majority of long-term stock market wealth creation.

Missing these extraordinary businesses can significantly reduce long-term portfolio returns.

The objective, therefore, is not to avoid IPOs altogether, but to avoid allowing excitement to dictate investment decisions.

Owning exceptional companies remains essential—but valuation remains equally important.

What About Investing Before the IPO?

Over the past two decades, the landscape of corporate financing has undergone a profound transformation. Historically, many of the world's most successful companies entered public markets relatively early in their development. Businesses such as Microsoft, Amazon, Cisco, and Apple became publicly traded while they were still in the early stages of their growth journey, allowing public investors to participate in decades of extraordinary value creation.

Today, that landscape looks very different.

The abundance of private capital—from venture capital firms, sovereign wealth funds, private equity sponsors, family offices, institutional investors, and specialist growth funds—has fundamentally changed how companies finance expansion. Instead of relying on public markets to raise capital, many businesses now remain privately owned for significantly longer periods while continuing to scale globally.

As a result, companies often achieve multi-billion-dollar valuations, global customer bases, mature business models, and substantial revenues before ever considering an initial public offering.

For investors, this evolution creates both opportunity and complexity.

The attraction of investing before an IPO is obvious. Early investors have historically benefited from purchasing shares at valuations that were dramatically lower than those eventually seen in public markets. Every investor naturally asks the same question:

"If the greatest gains occur before a company becomes public, shouldn't I simply invest earlier?"

While the question is logical, the answer is considerably more nuanced.

The Reality of Private Market Investing

Private investing is frequently portrayed as an exclusive gateway to exceptional returns. Headlines often celebrate early investments in companies such as Airbnb, Uber, Meta, Alphabet, SpaceX, Stripe, or OpenAI, creating the impression that private markets consistently outperform public markets.

The reality is very different.

For every globally successful private company, hundreds—or even thousands—fail to achieve commercial success. Many consume significant amounts of capital before ultimately being acquired at disappointing valuations or ceasing operations altogether.The exceptional returns often highlighted in financial media represent only a small fraction of the broader private market ecosystem.

Academic research consistently demonstrates that venture capital returns are highly concentrated. A relatively small number of investments generate the overwhelming majority of industry profits, while the majority of portfolio companies produce modest or even negative returns.

Success therefore depends less on participating in private markets generally and more on identifying the few exceptional businesses capable of becoming global market leaders.

Access Is Often More Valuable Than Capital

One of the greatest misconceptions surrounding private investing is that capital alone creates opportunity.In reality, access is frequently the defining advantage.The most promising private companies rarely seek funding from the general investment community. Instead, they attract capital from long-standing institutional relationships developed over many years.

Leading venture capital firms, sovereign wealth funds, strategic corporate investors, and experienced family offices often receive investment opportunities long before they become widely available.By the time many private investment opportunities reach broader markets, a substantial portion of the company's future growth has already been reflected in its valuation.

Consequently, the phrase "pre-IPO investment" should never be interpreted as synonymous with "early-stage investment."Many so-called pre-IPO rounds occur only months before listing, at valuations already approaching those expected in the public market.

Higher Risk Often Accompanies Higher Potential

Private companies operate without many of the disclosure requirements imposed on listed corporations.

• Financial reporting is less standardized.

• Corporate governance structures vary considerably.

• Liquidity is limited.

• Independent analyst coverage is virtually non-existent.

Investors may hold positions for many years without any ability to sell, regardless of changing market conditions or personal circumstances.Unlike publicly traded shares that can typically be sold within seconds, private investments frequently require patience measured in years rather than days.This illiquidity represents one of the largest risks—and simultaneously one of the reasons investors may demand higher long-term returns.

Valuation Discipline Remains Essential

Perhaps the greatest mistake investors make is believing that investing before an IPO automatically guarantees superior returns.

History provides countless examples demonstrating otherwise.

Even outstanding companies can become poor investments if purchased at unrealistic valuations.

Private market enthusiasm occasionally drives pricing to levels that assume years of perfect execution, leaving little margin for operational setbacks or changes in market conditions.

The quality of the business alone is never sufficient.

Investment returns ultimately depend on the relationship between price paid and value received.

This principle applies equally to both private and public markets.

The Importance of Manager Selection

For institutional investors, one of the strongest predictors of private market success is manager selection.Unlike public equity investing, where information is broadly available, private market performance often depends heavily on the experience, network, sourcing capability, operational expertise, and governance standards of the investment manager.Elite venture capital and private equity firms have consistently demonstrated an ability to identify transformational businesses before they become widely recognized.

Their competitive advantage extends beyond capital allocation.

They provide strategic guidance, executive recruitment, governance support, operational expertise, and access to global commercial networks that help portfolio companies accelerate growth.Selecting the right investment manager is therefore often more important than selecting an individual company.

Public Markets Still Create Extraordinary Wealth

Although companies now remain private for longer than previous generations, investors should not underestimate the wealth creation that continues after a business becomes publicly listed.Many of the world's greatest corporations generated the majority of their market capitalization after entering public markets.Microsoft, Amazon, Apple, Alphabet, NVIDIA, and numerous other global leaders have continued creating enormous shareholder value long after their IPOs.Public ownership provides increased transparency, stronger governance, greater liquidity, broader analyst coverage, and easier portfolio diversification.

For many investors, these advantages outweigh the possibility of capturing a small portion of earlier private-market appreciation.The objective should not be to own a company at the earliest possible stage.The objective should be to own exceptional businesses throughout the period during which they continue creating value.

Aura's Investment Perspective

At Aura Solution Company Limited, we believe investors should avoid viewing private markets and public markets as competing investment destinations.Instead, they represent complementary components of a comprehensive long-term investment strategy.Private markets provide access to innovation before companies become publicly traded. Public markets provide liquidity, transparency, diversification, and the opportunity to participate in decades of continued corporate growth.

Neither market is inherently superior.

Both require disciplined investment processes, rigorous due diligence, thoughtful valuation analysis, prudent risk management, and a long-term investment horizon.

Successful investing has never been about buying first.

It has always been about buying well.

Whether evaluating a venture-backed technology company, a pre-IPO growth business, or an established multinational corporation, the fundamental questions remain unchanged:

• Does the company possess durable competitive advantages?

• Can management continue allocating capital effectively?

• Is the business capable of generating sustainable long-term cash flow?

• Most importantly, does today's valuation provide an adequate margin of safety?

These questions matter far more than whether an investment is classified as private or public.Throughout financial history, periods of excessive optimism have encouraged investors to pursue fashionable opportunities without sufficient regard for valuation or risk. Equally, periods of uncertainty have rewarded those who maintained patience, discipline, and conviction.

Capital markets consistently favor investors who think independently rather than emotionally.

An initial public offering should therefore never be viewed as a finish line—or as a race that must be won on the first day of trading.

It is simply the beginning of a company's life as a public enterprise.

For thoughtful investors, that journey often presents numerous opportunities to build positions gradually, assess execution over time, and invest with greater confidence rather than greater urgency.

At Aura Solution Company Limited, our philosophy remains unchanged:

Exceptional companies deserve long-term ownership—but exceptional businesses must still be purchased with discipline, patience, and sound judgment. Sustainable wealth is created not by chasing excitement, but by consistently allocating capital where long-term value significantly exceeds today's price.

Amy Brown

Wealth Manager

Aura Solution Company Limited

#aura_wealth_management