IPOs: You May Have More Exposure Than You Think

Many investors assume they have little or no exposure to private companies unless they invest in private equity funds or participate directly in IPOs. In reality, investors already have indirect exposure through the public companies they own in diversified stock portfolios.

Large publicly traded companies frequently invest in emerging private businesses as part of their growth strategy. For example, Microsoft owns a substantial stake in OpenAI, and similar relationships exist across the technology sector and other industries.

A research paper from Dimensional Fund Advisors titled “Hiding in Plain Sight” explores this concept, arguing that public equity portfolios can provide indirect exposure to private assets without the higher fees, reduced liquidity, and long lock-up periods commonly associated with traditional private equity investments.

Retail Investors Are Becoming More Involved in IPOs

According to Robinhood CEO Vlad Tenev (speaking on April 29, 2026), companies preparing to go public are now much more open to giving individual (retail) investors a larger allocation of shares in the IPO itself.

In 2021, when Robinhood first offered its IPO Access feature, it was difficult to convince company executives to set aside meaningful portions for retail clients. Today, the situation has shifted: allocations to retail investors have grown from the traditional 5–10% range to 20%, or even 30% or more in some cases. Companies are increasingly inviting everyday investors “to the table” earlier in the process.

This change gives more retail investors a chance to buy shares at the IPO price (before the stock begins trading publicly). While this can feel like an opportunity, it’s important to remember that getting access to the most popular IPOs is still competitive and limited.

Impact on Index Investors: Vanguard vs. Avantis vs. DFA

Vanguard and Traditional Indexing

Investors using broad market index funds from firms such as Vanguard automatically gain exposure to IPOs once they are added to market indexes. Funds tracking indexes such as total U.S. or international markets incorporate newly public companies according to predefined index rules.

This approach offers simplicity, broad diversification, and low costs. However, it also means investors are exposed to the full “IPO tax” — buying shares at potentially inflated surge price leading to underperformance in the future. Index funds generally have little flexibility to avoid newly added companies that may carry elevated valuations or limited trading liquidity immediately after going public.

There is often a delay between an IPO and its inclusion in a benchmark index, although newer “fast entry” rules have shortened this timeline in some cases. Once a stock is added, index managers rebalance portfolios accordingly, which can result in buying shares after substantial price appreciation or during periods of heightened investor enthusiasm.

Factor-Based Investing: DFA and Avantis

Systematic, factor-oriented managers such as Dimensional Fund Advisors and Avantis Investors often take a more selective approach to recent IPOs.

Rather than mechanically purchasing newly public companies immediately upon index inclusion, these firms typically evaluate characteristics such as profitability, valuation, and investment behavior. Because many IPOs tend to exhibit lower profitability, higher valuations, and aggressive growth assumptions, factor-based strategies may underweight or avoid some newly issued stocks until market pricing becomes more attractive.

Dimensional, for example, avoids inclusion of IPOs for the first year, citing their tendency to load on low expected-return factors (small-growth, low profitability, high investment). DFA's total market approaches differ from strict indexing by trading patiently and incorporating research on IPO performance. Their implementation can reduce the drag from mechanical rebalancing or hot IPOs. They also highlight the private exposure nuance in public stocks.

From an investment standpoint, patience can be an advantage. As lock-up periods expire and more shares become available, prices often reflect a broader set of market participants. This can lead to more reliable pricing and better alignment with long-term fundamentals.

Similarly, Avantis emphasizes profitability, value, and investment factors. While they are more selective or patient with IPOs than traditional indexing, they will include an IPO if they have enough information about a company’s cashflow and other factors to determine if the price is attractive or not. The goal is avoiding the worst of the underperformance cohort while still capturing broad market exposure.

Patience and Long-Term Discipline Matter

Patience can often be beneficial when evaluating IPOs. As lock-up periods expire and more shares become available for trading, pricing may begin to reflect a broader range of market participants and more complete information about the company’s financial fundamentals. Over time, this can lead to valuations that are more aligned with long-term expectations rather than short-term enthusiasm.

The broader implication for investors is that exposure to IPOs already exists in many diversified portfolios, both directly through index inclusion and indirectly through public companies’ private investments. While traditional index investors receive broad, automatic exposure to newly public companies, factor-aware managers may have greater flexibility to manage some of the risks associated with elevated IPO valuations and speculative market conditions.

As future mega-IPOs emerge, differences between strict index-tracking approaches and more flexible implementation strategies may become increasingly important — particularly if rapid index inclusion channels large flows of capital into highly valued companies shortly after they go public.

Disclosures:

Apella Capital, LLC (“Apella”), DBA Apella Wealth, is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered or excluded or exempt from registration requirements. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Apella Wealth provides this communication as a matter of general information. Any data or statistics quoted are from sources believed to be reliable but cannot be guaranteed or warranted.