Bill Ackman Has a SPARC
Also electric-vehicle rentals, volcano bonds, ice cream, Lucian Freud and Spider-Man.
How much would you pay for the right to buy one share of one big future initial public offering at the IPO price? What a strange question. You don’t know which IPO it will be, or when, or what the price is. Just some big company, sometime in the future. One useful piece of information is that most IPOs go up; in particular, the average first-day IPO pop is around 18%. So if you buy a share at the IPO price and sell immediately, you’ll probably make about 18%, though there is a lot of variance around that number.1 But let’s just say you’ll make 18% — but 18% of what? If the IPO price is $10, you’ll make $1.80, and the right to buy one share is worth about $1.80 discounted for time (I also haven’t told you when this IPO will happen) and general uncertainty. If the IPO price is $100, you’ll make $18, and the right to buy one share is worth about $18.
It is a strange problem in option valuation. But the value can’t be zero, can it? Most IPOs do go up; mostly shares price in a range of, you know, $10 to $100 or whatever. Being able to buy a share at the IPO price is valuable. You’d pay something for it. I suppose you put together your best guess at a probability distribution for when this IPO will happen, how big it will be, and how much it will pop on its first day, and you use that to estimate what the right is worth.