IPO Performance Research Memo

Executive Summary

Your hypothesis is broadly supported by the evidence: on average, IPOs do not perform especially well over the long run. The most consistent finding is that IPOs, as a group, tend to underperform comparable public companies after listing, even after excluding the first-day return.[1][2]

The return distribution is highly skewed. A relatively small number of standout winners account for a large share of total gains, while most IPOs lag the market or comparable firms.[1] For an institutional investor, that means IPO investing is generally not an attractive source of passive, indiscriminate long-run alpha, but it may still be attractive as a selective strategy that exploits dispersion.[1][2]

On the size question, the evidence suggests a meaningful difference between larger and smaller IPOs, though the conclusion is stronger directionally than mechanically. Larger IPOs appear to be more stable, less speculative, and less dependent on extreme first-day pops. Smaller IPOs are more likely to show wider dispersion, including sharper first-day gains in some cases and weaker long-run performance in many others.[1][2][3]

Bottom Line

  • Average long-run IPO performance is weak.[1][2]
  • Most IPOs underperform; a small minority drive the category’s success.[1]
  • The weak long-run pattern is not explained only by small-cap effects, because underperformance persists even relative to size-matched firms.[2]
  • Larger IPOs appear safer and less volatile.
  • Smaller IPOs appear more asymmetric: more upside in select cases, but a higher probability of disappointing long-run outcomes.[1][2][3]

Evidence on Long-Run IPO Performance

The University of Florida’s updated IPO statistics provide one of the clearest long-run datasets. For IPOs issued from 1980 through 2024, newly public companies underperformed firms of the same size by an average of 3.6% per year over the five years after issuance, excluding the first-day return.[2] Using a stricter benchmark that matches on both size and book-to-market, IPOs still underperformed by 2.1% per year.[2]

This is important because it suggests the long-run weakness is a genuine post-IPO phenomenon rather than only a byproduct of sector mix or small-company risk.[2]

Nasdaq’s summary of 2010–2020 IPOs reaches a similar practical conclusion. It reports that nearly two-thirds of IPOs underperformed the market three years after listing, and 64% lagged by more than 10%.[1] That result is especially relevant for investors who treat IPO allocations as a broad asset bucket rather than a highly selective strategy.

Why IPO Returns Can Look Better Than They Are

IPO returns can be misleading because first-day trading often dominates the narrative. In many offerings, the immediate listing-day gain creates the impression of strong performance, but that early pop is not always accessible to all investors in size, and it frequently does not translate into sustained outperformance over one-, three-, or five-year periods.[1][2]

For institutional investors, the key distinction is between:

  • Accessing underpriced allocations at the offer price
  • Buying in the aftermarket after the stock is already public

The long-run evidence is much less favorable for the second activity than headlines around IPO “pops” might imply.[1][2]

The Distribution Is Highly Skewed

The IPO market is not uniformly poor; it is uneven. Nasdaq reports that the top 10% of IPOs produced average market-adjusted returns above 300%, while lower top deciles delivered far less, around 75% and 25% for the ninth and eighth deciles respectively.[1]

This means average outcomes conceal a power-law-like structure:

  • Most IPOs are mediocre or poor investments
  • A small subset become major long-term winners
  • Missing those winners can make the whole category look unattractive
  • Owning them can make selective IPO investing look highly successful

This skew has direct portfolio implications. If a manager does not have an edge in sourcing, filtering, or sizing exposures, broad IPO participation is unlikely to produce strong excess returns.[1][2]

Large vs. Small IPOs

What the Evidence Says Directly

The strongest direct point is that IPO underperformance remains even when researchers compare IPOs with firms of the same size.[2] That implies the post-IPO effect is not merely a small-cap artifact.

At the same time, market evidence suggests size still matters in how returns are distributed. EY notes that hyper-jumbo IPOs often come to market when conditions are especially favorable, and successful pricing plus supportive aftermarket trading can signal strength and institutional sponsorship.[3]

Renaissance Capital’s statistics are also informative in what they exclude: their U.S. IPO market statistics use a $50 million market-cap floor, which means many very small micro-IPOs are omitted from headline market summaries.[4] SEC data likewise show that aggregate IPO counts and average proceeds vary materially over time, reinforcing the idea that the market spans very different issuance types.[4][5]

Practical Interpretation by Size

While the available evidence does not provide a single universal table showing long-run returns for “large” versus “small” IPOs across all markets and periods, the balance of evidence supports the following institutional interpretation:

Larger IPOs

  • Tend to be more mature businesses with broader institutional sponsorship
  • Often have larger float, deeper liquidity, and more analyst coverage
  • Are generally less dependent on speculative retail demand
  • May exhibit smaller relative mispricings and less dramatic day-one pops
  • Likely offer lower volatility and lower dispersion after listing

Smaller IPOs

  • Tend to have less operating history, lower liquidity, and more uncertain valuation anchors
  • Are more exposed to sentiment, issuance windows, and promotional dynamics
  • May generate larger first-day moves in favorable conditions
  • Are more likely to produce extreme long-run outcomes, including severe underperformance
  • Can offer more upside if they become category winners, but with lower hit rates

In short: large IPOs may be safer but less explosive; small IPOs may be more optionality-driven but less reliable.[1][2][3]

Institutional Investment Implications

For an institutional investor, the evidence argues against treating IPOs as a homogenous return source.

Implication 1: Avoid indiscriminate exposure

A broad strategy of buying IPOs simply because they are new issues is not supported by the long-run evidence.[1][2]

Implication 2: Focus on selectivity

Because returns are dominated by a minority of major winners, manager skill in filtering matters more than category exposure alone.[1]

Implication 3: Separate allocation access from aftermarket investing

The economics of receiving allocations at the offer price can differ materially from buying after listing, especially when a stock opens well above issue price.[1][2]

Implication 4: Treat small IPOs as higher-dispersion assets

Smaller deals may offer more upside per name, but they should be sized with the expectation of higher failure rates and worse liquidity outcomes.

Implication 5: Use size as one screening variable, not a thesis by itself

Size helps identify differences in risk, volatility, and market structure, but size alone does not overturn the broader conclusion that average post-IPO performance is weak.[2]

Conclusion

The evidence supports your hypothesis. On average, IPOs do not generate strong long-run performance, and they frequently underperform both the market and comparable public firms after listing.[1][2]

The category’s weak average result is partly masked by a small number of exceptional winners, which means the opportunity set is driven more by dispersion than by a favorable base rate.[1]

On the large-versus-small question, the most defensible conclusion is:

  • Large IPOs are generally more stable, more liquid, and less extreme in both directions
  • Small IPOs are generally more volatile and more prone to disappointing long-run results, even though they may occasionally deliver outsized gains

That makes IPO investing a strategy where selectivity, access, and portfolio construction matter far more than simple participation in the asset class.