NEW YORK, May 27 (Reuters) - Large mutual funds and passive index funds are starting to set aside more cash and preparing to offload some of their existing holdings in large-cap stocks, as they prepare to add upcoming blockbuster IPOs like SpaceX and OpenAI to their portfolios.
For passive funds, the potential inclusion of newly public companies could force them to sell down existing holdings in other large-cap stocks, said John Flood, managing director,Global Banking & Markets, FICC & Equities at Goldman Sachs, in a May 22 note to clients.
"Investors are increasingly focused on the impact of potential large IPOs in the pipeline. Ahead of each of the four largest IPOs during the past few decades, U.S. equity mutual funds increased their cash balances," said Flood.
The latest moves from the biggest asset managers come as blue-chip indexes like the Nasdaq 100 and S&P 500 are rolling out new rules that are expected to speed up the addition of newly listed megacap companies to the benchmarks.
These new rules would most likely apply to the record-breaking IPO of SpaceX, which is targeting a valuation of around $1.75 trillion for its listing - which would make it the seventh-most valuable U.S. company, based on the latest share prices.
AI market leaders OpenAI and Anthropic are also seeking to tap the public markets in the coming months and would most likely be eligible for fast entry into benchmarks, given their most recent valuations. Reuters reported in October that OpenAI could seek to be valued at about $1 trillion or more at the time of its listing, while Anthropic is currently in talks to close a funding round that could value it at nearly $1 trillion.
Analysts tracking large indexes said healthy retail investor cash balances are also likely to feed in to the frenzy for new stock market listings.
"The capacity, as well as the willingness to invest into equities remains strong," Deutsche Bank analysts said in a note to clients on Tuesday, adding it was supported by "huge household cash balances accumulated during the pandemic."
BENCHMARK INCLUSION BOOSTS LIQUIDITY
Admission to benchmarks like the Nasdaq 100 or the S&P 500 gives companies increased access to the deep-pocketed institutional investors who typically buy sizable positions for their own index funds, broadening their shareholder base and improving liquidity over time.
For executives and early investors, that deeper liquidity could reduce the market impact of large sell orders once lockup periods expire, typically 90 to 180 days after an IPO. But it does not fully protect against a large wave of insider selling that could weigh on the share price.
Flood said large IPOs that are fast-tracked into key indexes would carry small weights in the benchmarks at first although the impact would grow as the company's float factor increases.
In the Tuesday note, the Deutsche Bank analysts said: "Even the largest expected IPO amounts equal a little over 0.1% of the current S&P 500 market cap."
(Reporting by Anirban Sen in New York; Additional reporting by Lewis Krauskopf and Chuck Mikolajczak in New York; Editing by Megan Davies and Matthew Lewis)
