Where have all the IPOs gone?
Initial public offerings, or IPOs, are risky investments that have all but dried up during the recession. But Fidelity Investments is opening up exclusive access to IPOs from a private equity firm to drum up new business.
Picture of a graph depicting mutual fund values. (Vasko Miokovic)
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TESS VIGELAND:Perhaps you've found yourself asking recently, whatever happened to the IPO? OK perhaps you haven't. But certainly you remember the days when initial public offerings made scads of people scads of money. IPOs were always risky and in these risk-averse days instead of going public they went silent. But the tide may be turning. This week Fidelity Investments, the nation's largest mutual fund company, announced it will offer its customers exclusive access to IPOs from a private equity firm.
Marketplace's Jeremy Hobson looked into whether this is a good idea for anybody.
Jeremy Hobson: Kohlberg, Kravis, Roberts and Company (or KKR for short) owns dozens of companies, but it hasn't taken one public in three years. Which means its own money is tied up and can't be invested in new companies.
Bruce Foerster is president of South Beach Capital Markets. He says with the Fidelity deal, KKR gets access to new investors, so it can free its own cash.
Bruce Foerster: KKR is attempting among other things to recapture fees, and I would suspect, trying to get more control over their own destiny.
As for Fidelity, he says, the mutual fund company is looking to take advantage of a changing landscape on Wall Street. Perhaps capture some of the wealthy clients fleeing big name firms like Merrill Lynch and UBS. The kind of people who are intrigued by talk of IPOs.
Foerster: Wall Street views the IPO product as proprietary product.
In other words, you have to be in a club to get access, and Fidelity now has the secret password. At least for its more sophisticated clients, who have more than $100,000 invested. But even if you fit that description, Foerster says, you shouldn't necessarily be jumping on the IPO bandwagon.
Foerster: It's like a lot of things, it looks easy and looks simple and it isn't.
Marion Asnes: In order to be investing that way, you really need to do two things.
Marion Asnes is the editor of Financial Planning magazine.
Asnes: One is know a tremendous amount about the company and its prospects and how it's managed. How is it making its money? The second thing you need to know is that you can afford to lose the money because things go wrong as well as right.
Just ask investors who took advantage of the IPO boom that fueled the tech bubble and threw money into Pets.com. The Web site barked onto the scene in 1998 and went the way of Old Yeller in 2000. But Fidelity isn't offering access to IPOs to long-term investors with just a mutual fund or a 401k.
Asnes: It's for institutions, it's for wealth managers, and it's for wealthier clients.
The importance of Fidelity's move for the rest of us, Bruce Foerster says, is indirect. The company is positioning itself in case of an IPO boom.
Foerster: If the IPO market starts to heat up again, the word gets out very quickly within minutes, seconds, and Fidelity's big clients, individual clients, are going to push on Fidelity's brokers and say, "Hey, I want some of that product."
And if that product is fruitful, Foerster says, it could mean a lot of jobs for a lot of people. That, he says, is what IPOs do best -- raise money for companies to grow.
Foerster: I see it as a national asset; it's an integral part of the great American job creation machine.
Even if, on the investing side, it kind of resembles a slot machine.
In New York, I'm Jeremy Hobson for Marketplace Money.
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