Academic insights at the private-public interface – Prof. Michelle Lowry (IPO Stories, ep. 37)

Michelle Lowry is a Professor of Finance at Drexel University, and has dedicated her research agenda to IPOs, corporate governance and retail investing.

With Michelle, we discuss some of the factors behind the drop in the number of listings over the last 20 years, in particular the change in the type of companies that are going public, the optimal corporate governance structures for newly public companies, in particular how it differs from that of mature public companies, and how the occurrence of IPOs are an important stimulation for retail participation in the stock market.

 

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Disclaimer: The discussion in this episode is not financial advice, nor an investment recommendation, nor a solicitation to buy or sell any financial instruments or an offer for financial services or any other transaction. The information contained in the recording has no contractual value and is intended for informational purposes only. Amundsen Investment Management and the participants in this podcast may have holdings in the companies being discussed. Any views expressed are those of the guests only, and not of Amundsen Investment Management.

 

 

[0:41] Per Einar Ellefsen: In today’s episode, we sit down with Michelle Lowry, who’s a Professor of Finance at Drexel University. Professor Lowry has dedicated her research agenda to IPOs, in particular the blurring lines between public and private ownership and the governance of public and private companies. With Michelle, we dive deep into why companies are staying private for longer, the different types of crossover investors and how they influence company behavior, and how IPOs in turn affect retail investor participation. 

[1:05] Per Einar Ellefsen: In particular, we’ll discuss how the type of companies has changed over the years and the impact of this on the public-private interface. 

[1:11] Per Einar Ellefsen:  Michelle, thank you very much for joining the podcast today. 

[1:40] Per Einar Ellefsen: Can you start by introducing your background and what brought you to research IPOs? 

[1:46] Michelle Lowry: Of course. Let me start by saying thank you—I’m very excited to be here today and looking forward to the conversation. A bit of my background: I’m a finance professor. I went to grad school during a period with a lot of IPO activity, and I guess that’s what initially began my interest. I was in grad school in the late 90s and early 2000s, and that coincided with a period when IPOs were in the headlines almost every single day. In 1996, almost 700 companies went public—that’s almost three a day. 

[2:19] Michelle Lowry: In 1999, average initial returns—that is, the one-day return between the offer price and the end of the first day of trading—were over 75%. There were months where the average initial return was over 100%. Companies were doubling in value in one day. And of course here I am getting a PhD in finance and my friends would say, “Oh, finance—explain to me this IPO thing, what’s going on here?” And, you know, I didn’t know—but it struck me as a pretty interesting question. 

[2:46] Michelle Lowry: And so I started digging into it and, many years later, here I still am. 

[2:51] Per Einar Ellefsen: That must have been an incredible time to start thinking about IPOs. Unfortunately, a lot of those ended up underperforming in the end, I guess. 

[2:59] Michelle Lowry: Sure—by dramatic amounts. But for us doing research, that just gives more questions to try to look into. 

[3:05] Per Einar Ellefsen: Exactly. What are the main topics you’ve sought to address as part of this research over the years? 

[3:10] Michelle Lowry: There have been a number. To begin with, I was intrigued with the fluctuations in the numbers of companies going public. Why is it that in one year we can see so many companies going public and in the next year such a dramatic fall-off? Recently, in 2021 we had over 300 companies go public, and in 2022 we had only 38. Why is it that in one year—what’s changing so much? 

[3:38] Michelle Lowry: I was intrigued by whether it’s underlying macroeconomic factors that are driving these changes, or more investor-sentiment-type forces at work, and I tried to dig into the relative effects of each. Another stream of literature focuses more on pricing effects. I’ve looked at initial returns and why some companies are so underpriced and others overpriced. 

[4:07] Michelle Lowry: We talk a lot about the average underpricing of IPOs, but over long sample periods, approximately one-third of IPOs are overpriced in the sense that they end their first day of trading below the offer price—and that gets a lot less attention. So how should we think about that? I’ve done some work there. Finally, a third stream focuses on corporate governance, looking at companies in the one to two years after they go public and how we should think about the optimal corporate governance at that stage of their life cycle. 

[4:40] Michelle Lowry: The reason I’m so interested is we have a lot of regulations related to governance—from the SEC and the exchanges—and the SEC relies heavily on academic research in writing these regulations. But the vast majority of academic research is based on the S&P 1500 firms. 

[5:09] Michelle Lowry: And what if the best governance structures for large, mature firms are not the same as the best governance for a small, recently public firm? I’ve spent time looking into those issues. 

[5:24] Per Einar Ellefsen: Great—and we’ll delve a bit more into the details. Maybe we can start with the number of IPOs. In 2021 there was a large wave; 2022 had far fewer; 2024 a bit more, but overall it’s been quiet. Over a longer period, the number of companies going public has decreased substantially over the past 20 years. Why is this? 

[5:47] Michelle Lowry: Great question. Lots of factors—let me focus on a few. Many private companies today choose to get acquired rather than go public. Some wait longer so they’re staying private longer; some ultimately go public, but many get acquired instead. That raises the question: why avoid the public eye? 

[6:14] Michelle Lowry: One reason is that companies today are often in industries where intellectual property is a key source of value—tech, biotech, etc. When these companies go public, they have to make in-depth public disclosures—the prospectus, 10-K, proxy, 8-K, etc. That benefits investors, but it also provides the same information to competitors. Not surprisingly, companies don’t want to share all their information with competitors, so they either stay private longer or choose to be acquired to retain more secrecy. 

[7:20] Michelle Lowry: A second key factor is the increased availability of capital for private companies. In the 90s, if a company needed a lot of capital, it had few options other than going public. That’s simply not the case anymore. There’s much more capital in private equity and venture capital, and also from investors like hedge funds and mutual funds—we’ll talk more about that. For example, in March 2023, Stripe did a Series I round and raised $6.5 billion. As a comparison, average IPO proceeds over long periods are around $150 million. A private round many, many times larger than a typical IPO—that capital just didn’t used to be available. 

[8:44] Per Einar Ellefsen: On your first point, we also see the other way around: if a subsector has a few competitors already public, the private company usually wants to go public for brand recognition and acquisition currency—it’s seen as a competitive advantage. 

[9:05] Michelle Lowry: Right—great point. Those forces can counterbalance each other, and there’s a lot of company-specific dynamics. Some firms feel they have to go public to make acquisitions, versus the countervailing trend of companies making more acquisitions even before they go public. All of these play a role. 

[9:37] Per Einar Ellefsen: So the profile of companies overall has changed—more tech, more IP. But have the companies going public also evolved? 

[9:44] Michelle Lowry: Absolutely. As companies stay private longer and smaller firms are acquired or don’t go public, the ones that do list look different: older, larger, a bit further along—slower growth than earlier stages—and in different industries. Along all these dimensions we see big changes. 

[10:14] Per Einar Ellefsen: You mentioned investors. One change has been the growth of the crossover investor. Your research shows capital deployed in private companies by mutual funds moved from something like tens of millions to multiple billions per year. And crossover goes both ways—Sequoia, for example, expanded from VC to being a majority public investor. Can you explain what crossover investors are and how they’ve changed? 

[10:41] Michelle Lowry: This is fascinating. Some investors traditionally focus on public companies—hedge funds, mutual funds. Others traditionally focus on private—venture capital, private equity. Increasingly, each group invests outside their traditional focus. VCs still mainly invest in private companies, but we also see them investing in public companies. 

[11:16] Michelle Lowry: In our research, about 15% of VC-backed IPOs see a VC invest more money after the company goes public—that’s striking. On the flip side, mutual funds, whose focus has been public companies, now invest in private companies. In 2016, almost 40% of VC-backed IPOs had mutual fund investment prior to going public. We still observe that. Think of Instacart’s IPO—Fidelity and T. Rowe Price invested pre-IPO. Reddit—again Fidelity invested pre-IPO. 

[12:20] Per Einar Ellefsen: For VCs, the reasoning might be to follow high-quality companies because the biggest winners create so much value post-IPO. For mutual funds, it helps to have public-markets investors engaging before the IPO to give feedback on valuation and readiness—being successful as a public company is different from being private, right? 

[12:53] Michelle Lowry: I think that’s right. One nuance: when we look at cases where there’s a VC investor after the IPO, only about half are the same VC that invested pre-IPO. In many cases, it’s actually a new VC investing for the first time after the company is public. 

[13:23] Per Einar Ellefsen: Interesting. That changes the VC model. 

[13:27] Michelle Lowry: Totally. To be clear, the VCs that invest post-IPO almost always have a competitive advantage in that industry—maybe they invested in another company in the same space. 

[13:50] Per Einar Ellefsen: What’s driven this evolution toward more complex types of ownership? 

[13:55] Michelle Lowry: Starting with mutual funds: companies seek more capital to postpone going public, and mutual funds are one source. We find the availability of mutual fund capital causally enables companies to stay private longer. From the mutual fund perspective, they’re under pressure to find new alpha. There are fewer public companies today than 20–30 years ago, and passive investment has grown dramatically—both put added pressure on active mutual funds to generate alpha. 

[15:02] Michelle Lowry: When I talk to mutual fund managers investing in pre-IPO firms, they say: we’ve got to generate alpha; there are fewer public names; let’s look at private companies—many large private companies look a lot like public companies, and we feel we can value them. 

[15:26] Per Einar Ellefsen: Have they actually made higher returns from those investments? 

[15:30] Michelle Lowry: Surprisingly, yes—during our sample period. Anecdotes suggested they’d underperform, but we find that, at a minimum, they do as well as in public investments, and in most specifications, a bit better. 

[15:56] Per Einar Ellefsen: So mutual funds generate alpha from IPOs and pre-IPO investments. 

[16:00] Michelle Lowry: Exactly. Another source of alpha: when they invest pre-IPO, they’re more likely to get IPO allocations—and perhaps larger ones. 

[16:14] Per Einar Ellefsen: What about the other crossover direction? 

[16:19] Michelle Lowry: VCs investing in public companies is the mirror image. Mutual funds pick private companies that most resemble public ones—larger, older. VCs pick public companies that most resemble private ones: recently public, often previously VC-backed, still high growth, and characterized by high information asymmetry—lots of uncertainty about true value. 

[16:50] Michelle Lowry: Such a company needs new capital for projects. It could try a seasoned equity offering, but investors are naturally skeptical—is it funding positive-NPV projects or selling overvalued equity? Credibly conveying that requires disclosing lots of inside information—which competitors also see. A solution is a PIPE—private investment in public equity—sharing detailed information with a small set of investors. Best case: investors who already understand the industry and even the company. That’s where VCs come in—they often invested pre-IPO and can better differentiate genuine opportunities from market timing. We find VC investors do very well in these PIPEs, earning very positive abnormal returns. 

[18:57] Per Einar Ellefsen: So VCs invest in public equities when they have a specific information advantage and get good allocations. 

[19:08] Michelle Lowry: Exactly. And it’s good for companies too. When PIPEs with VC participation are announced, we see average abnormal announcement returns of ~8%, rising to 12–16% when the VC invested at the IPO, will sit on the board, or is investing more. 

[19:49] Per Einar Ellefsen: Back to private companies with more public-type investors (mutual funds, hedge funds): what’s the effect of having more of these on board? 

[20:03] Michelle Lowry: We can offer facts and some conjecture—data are thinner privately. We show mutual fund capital enables companies to stay private longer—and they seem to prefer that. Companies benefit from some mutual fund investors, but wouldn’t want all investors to be mutual funds. VCs provide capital plus advice, connections, and help with hiring—deep involvement that mutual funds typically don’t provide. 

[21:12] Michelle Lowry: I like the Shark Tank analogy: the entrepreneur doesn’t always choose the shark offering the most money; often they choose the one with industry expertise who can help them get to the next stage. The VC is the shark with money and expertise—it’s fine to take some from the other shark, but not all. 

[21:40] Per Einar Ellefsen: Public-type investors bring governance expectations. Private investors often have board seats; mutual funds/hedge funds typically don’t, but expect boards to protect minority shareholders. How should we think about governance as the company moves toward being public? 

[22:15] Michelle Lowry: Factually, when mutual funds invest in private rounds, they typically have board observer rights, not seats—so they get information without control. We see late-stage private companies (10–18 years old) whose boards increasingly resemble public boards: larger size and more independent directors. These appear to be voluntary decisions by companies recognizing the benefits of expertise—on both monitoring and advising. Evidence suggests it’s more management and VCs, not mutual funds, pushing those structures. 

[23:36] Per Einar Ellefsen: Approaching a listing, some structures change due to regulation and investor voting. Your research shows mature public companies have fewer controversial structures (dual-class, staggered boards), yet newly listed companies increasingly have them. How does that square? 

[24:08] Michelle Lowry: There’s a contrast. Recent IPO firms have unique governance demands different from mature firms. At the same time, some founders want to retain control. When evaluating governance for newly public firms, we need to consider both—unique demands and founder incentives. 

[24:50] Per Einar Ellefsen: Once listed, what does the data suggest as an optimal board/governance setup? Is founder control helpful early on, or does it create issues? 

[25:12] Michelle Lowry: There are trade-offs. A unique aspect of newly public firms is management inexperience: earnings calls with institutions, M&A, major lawsuits—often firsts. Management relies more on the board for advice. That can make some structures value-increasing for IPO firms even if they’re value-decreasing for mature firms. 

[26:17] Michelle Lowry: A key example is classified (staggered) boards. For mature firms, they’re often value-decreasing: underperformance is harder to address; activists have more difficulty. In contrast, for IPO firms, we conjecture classified boards are more likely value-increasing. Young, high-growth firms benefit from board continuity, and recent IPO founders typically still own big stakes—so misalignment risks are lower. The negatives loom less, the positives more. 

[27:34] Michelle Lowry: Empirically, in later years of our sample (around 2018–2019), 80–90% of IPO firms have classified boards (mostly VC-backed), up from under 30% earlier—while among mature firms, classified boards move in the opposite direction over the same period. 

[28:10] Per Einar Ellefsen: That’s significant—the staggered board helping performance early on. Advice to founders? They’ll need more independent directors; some VC directors may step back post-IPO. How should founders think about this? 

[28:39] Michelle Lowry: Think in two dimensions. Founders naturally want control; some control is good, but not too much. One path founders sometimes choose is perpetual dual-class with superior voting and no sunset—evidence suggests that extreme is not positive. By contrast, dual-class with a time-based sunset, where founder control declines, or a governance structure like a classified board that provides some extra control without making it absolute, can be beneficial. 

[29:42] Per Einar Ellefsen: Switching topics: your paper on IPOs and retail stock-market participation. Retail participation surged in the U.S. post-COVID; globally it varies a lot. Japan’s IPOs often allocate ~50% to retail; Europe has low retail participation. Is it important to have retail as part of the market? 

[30:28] Michelle Lowry: It’s very important. Research shows stock-market participation is a key factor in building wealth. Yet in the U.S., depending on the measure, only about 60–65% of households own stock. We won’t ever expect 100%, but even among quite wealthy households, 10–20% still don’t participate. Some reasons: family businesses reinvesting all capital. But even after accounting for that, we still see a non-trivial group not participating—education and peer effects explain a lot of those gaps. 

[31:56] Per Einar Ellefsen: Your research shows a link between large local IPOs and retail participation in the stock market. Explain that link? 

[32:10] Michelle Lowry: One factor is awareness. A local IPO attracts attention—media coverage not only of the IPO firm but also the industry and broader market. Our hypothesis is that a local IPO draws attention and conversation, inducing increased participation. Using precise statistical techniques, that’s what we find. 

[33:09] Michelle Lowry: High local IPO activity increases stock-market participation by 5–6%—a meaningful magnitude. It increases both the likelihood households own stock and the share of equity in their portfolios. Crucially, people who previously were not in the market become significantly more likely to invest for the first time. 

[33:46] Per Einar Ellefsen: Europe’s privatization waves had similar effects—bringing in retail. It’s wealth creation, but also aligns citizens with economic policy. 

[34:13] Michelle Lowry: Agreed. The paper suggests policy relevance: education and awareness matter. When people become more aware, they’re more likely to participate. 

[34:32] Per Einar Ellefsen: Any other notable factors for policymakers? 

[34:41] Michelle Lowry: Wealth is a big one—you don’t want households with very low savings taking market risk. Education, knowledge, peer effects also matter. For wealthy but undiversified households (e.g., all wealth in a family business), it’s important to highlight diversification benefits. 

[35:32] Per Einar Ellefsen: There’s a regulatory dilemma. IPOs can be risky; disclosures are vast and few retail investors read a prospectus. To what degree should retail participate directly in IPOs versus focusing on the broader market? 

[36:25] Michelle Lowry: Important clarification about our paper: we study whether a local IPO event increases overall market participation—excluding the IPO stock itself. We agree it’s not ideal for a new investor to put all spare funds into one IPO. We’re capturing the attention shock from the local IPO that leads people to consider diversified stock investing. 

[37:57] Michelle Lowry: The stocks purchased aren’t random: more likely in the same industry as the IPO or also local—likely those highlighted in the same media coverage. They’re also somewhat more likely to buy the IPO stock, but that’s not our main focus. 

[38:27] Per Einar Ellefsen: Broadly on innovations to the IPO process—you’ve seen the good, the bad, and the non-innovations. What takeaways do you have for making the process smoother or easier? 

[38:52] Michelle Lowry: We can’t look at the IPO process in isolation. The decision to go public depends on the relative benefits of being public versus staying private. If the benefits of staying private have increased, small tweaks to the IPO process likely won’t move the needle. 

[39:57] Michelle Lowry: Being a private company today is very different from the 1990s: access to capital, industry mix, M&A markets—all changed. I spend time on “why fewer IPOs,” but then I ask, “why do we want more companies to go public?” 

[40:24] Michelle Lowry: A few reasons: when key economic activity is private, society knows less about the economy—public companies enhance transparency. Research shows the share of GDP represented by public companies has fallen. Another reason: as firms stay private longer, the highest-growth phases occur while private; many investors can’t access that—and lose out. 

[41:25] Michelle Lowry: From there, we can consider solutions. Perhaps allow broader investor flexibility to access private companies (some ETFs include private names)—but weigh trade-offs carefully. 

[42:16] Per Einar Ellefsen: From my perspective as a public-markets investor, the challenge is how much global value creation you can access—and at what cost. Public equity can be accessed at 5–10 bps; private at 2%+ per year. Founders, of course, just want to raise capital and do acquisitions. 

[43:10] Michelle Lowry: That’s a useful lens. How do we narrow the wedge? Would changing public-company regulatory requirements materially increase listings? Academic work suggests regulation isn’t the primary friction keeping firms private. Industry mix and the increased value of intellectual property loom larger—and we can’t change those fundamentals. 

[44:16] Per Einar Ellefsen: For listeners: the IP issue is a challenge because it’s harder to value—listing becomes tougher. 

[44:24] Michelle Lowry: Exactly—harder to value, and the competitive value of secrecy is greater. Building a manufacturing plant is very different from building an AI chatbot in terms of sensitive information. 

[44:56] Per Einar Ellefsen: Any favorite IPO from history? 

[45:00] Michelle Lowry: Red Hat in the late 90s—if I recall, an initial return around 697%. 

[45:08] Per Einar Ellefsen: 697%—for the Linux operating system. 

[45:11] Michelle Lowry: Exactly. Netscape kicked off a lot and got the whole internet going—that’s another favorite. I like first-in-industry IPOs—LinkedIn as the first social-media listing, for example. Valuation is especially challenging when there are no comparables, so price discovery is fascinating. 

[45:48] Per Einar Ellefsen: Thank you very much, Michelle. Great talking to you. 

[45:50] Michelle Lowry: I enjoyed the conversation—thank you. 

[45:53] Per Einar Ellefsen: Thank you for listening to IPO Stories. In future episodes, we’ll host CEOs, CFOs, and other participants in the IPO process to learn from their experience—like from Michelle today. If you like the show, please follow us on Spotify or Apple Podcasts and share the show with people around you. 

[46:07] Per Einar Ellefsen: If you have questions about the IPO process that you’d like us to address with future guests, please get in touch at contact@ipostories.com and follow our LinkedIn account. Amundsen Investment Management.