A model investor’s take on a big year for IPOs

Key takeaways

1. Initial public offerings (IPOs) are on the rise, and this year has some of the largest in history.
2. Warming IPO environments have historically been a sign of strong equity markets and abundant investor demand.
3. Exposure to recently IPO’d stocks within model portfolios is dependent on underlying active manager discretion and passive index rules.

IPOs are back in the spotlight with a series of high-profile public debuts reigniting investor interest in new issuance this year. For model portfolio investors, that raises several important questions…

What does today’s wave of IPOs mean for the AI investment theme?

Investing in a theme as multifaceted and fast-moving as AI has required an equally dynamic approach. For a long time, a cornerstone of the AI trade was absent from the public stock market: there were no frontier AI model providers. Raising capital from private markets, firms on the technological frontier stayed private for longer while their valuations grew. For model portfolio investors focused exclusively on public markets, that meant that these companies were largely inaccessible. It also means that the AI labs that have grown to be some of the largest companies in the country are poised to launch some of the largest initial public offerings (IPOs) In history, potentially opening parts of the investment universe that public-market investors have historically been unable to access.

What does a pickup in IPO activity tell us about the state of equity markets?

Historically, high IPO volume is a healthy sign for capital markets. Hot IPO years typically coincide with strong equity returns: looking back from 2000-2025, stocks outperformed during years with the highest IPO volume. Large raises from businesses signal both that they see opportunities with attractive returns on capital and that investors are willing and able to supply firms the necessary capital.

Equity investors have met a rising supply of new equity with equally strong demand. Investors signaled capacity at the start of the summer by oversubscribing to the largest ever IPO. Overall capital flows into US equities have also been notably robust¹. While some market commentators have suggested an influx of equity supply may pull on liquidity and exert negative pressure on the market overall, my team has found little empirical support for this claim. History has it that companies have fundraised during times when market participants have delivered ample appetite for the issuance.

How and when do newly public companies find their way into model portfolios?

As model portfolio providers, our exposure to single-name securities depends on our underlying funds. The BlackRock Model Portfolio Solutions team rigorously selects active ETFs for our Target Allocation model portfolios. We rely on these active managers’ discretion for evaluating and investing in prominent IPOs. Our investment universe also includes passive ETFs which follow explicit index inclusion rules. Such rules have been revisited by some index providers to potentially expedite the inclusion of megacap public debuts, yet notably the S&P 500, which benchmarks many of the equity ETFs that we hold, has not made such an exception.

This is particularly relevant for the iShares A.I. Innovation and Tech Active ETF (BAI). BAI specializes in investing along the value chain, or the “AI stack”; however, the frontier AI labs that are key players in this theme have been outside the public markets. One way that BAI has sought to capitalize on increased IPO activity is through investments in select private megacap companies that have indicated an intention to go public.

Should these companies pursue public listings, investors may benefit from the additional transparency associated with public markets. Publicly listed companies generally host annual shareholder meetings and post financial statements, which materially raise our knowledge about their businesses and shed light on matters affecting their counterparties, clients, and suppliers.

Bringing it all together

We welcome reheating IPO activity and view it as a healthy function of capital markets. AI innovation has contributed positively to corporate earnings, and financing it is a critical part of this investment cycle². As a key source of earnings growth in global stocks, we have leaned into the AI theme within our model portfolios. We continue to evaluate where it is driving earnings – in or out of fresh IPOs.