By Jim Toes, President and CEO, STA
Public markets serve as one of the most powerful mechanisms for price discovery. Like a force of nature, they rapidly incorporate all available information – financial results, competitive dynamics, macroeconomic conditions, and investor sentiment – into share prices with remarkable speed and efficiency. They act as a great equalizer. While day-to-day price fluctuations can sometimes appear irrational, over the long term, public markets separate truth from conjecture with brutal honesty.
As SpaceX prepares for its historic IPO this pricing mechanism will face one of its most high-profile tests in years. The debut offers a timely lens through which to examine how public markets have evolved in pricing newly public companies. Just a few decades ago, when private markets were far less developed, IPOs were smaller, and active managers dominated price-setting, the process looked very different. Today, the landscape is markedly changed, and the market’s core function in determining fair prices has evolved dramatically – driven in part by the rise of passive investing and the increased scrutiny of valuation metrics forged in private markets.
Looking Back to the 1990s
In the 1990s, the average IPO deal size typically ranged from $100 million to several hundred million dollars. Research coverage by broker-dealers was plentiful, and active asset managers ruled the day. Companies priced their IPOs based on roadshow demand and underwriter guidance. Once shares began trading, the market quickly determined whether the company had priced too low or too high. Volatility existed, but after the typical pre-IPO hype subsided, share prices often stabilized near fundamental value within weeks – sometimes even on the same day.
Fast-Forward to Today
Passive investing has transformed the landscape. Once a niche strategy pioneered by index funds in the 1970s, it now dominates. In the early 1990s, passive vehicles accounted for less than 5% of U.S. equity mutual fund and ETF assets. By 2025–2026, passive strategies represented approximately 55% of U.S. equity fund assets, with index funds and ETFs managing trillions globally. Passive investing now comprises a substantial and growing share of both institutional and retail portfolios.
Passive investment vehicles offer undeniable benefits to investors and capital formation. They have democratized access for retail investors by delivering low-cost, broadly diversified portfolios and exposure to asset classes previously difficult for individuals to reach. They provide competitive long-term returns while channeling trillions of investable dollars into public markets – enhancing liquidity in secondary trading, the very depth that companies pursuing an IPO require. However, this dominance can distort pricing efficiency in the early months of trading, even for the largest debutantes.
Thomas Laffont, co-founder of Coatue Management, captured this reality when asked about the time lag between a company’s IPO and when the market fully “washes through” passive flows. His response: “6 months and 1 day.”**
Historically, it took years for a publicly traded company to reach a market capitalization large enough for inclusion in major indices. Today, in our “Unicorn Economy,” scores of companies go public with market caps exceeding $1 billion, qualifying them almost immediately for broad passive indices. Index funds and ETFs then mechanically purchase shares in proportion to their target weightings. For a company of SpaceX’s anticipated scale, this creates automatic, large-scale demand upon inclusion – often irrespective of near-term fundamentals.
Valuation Metrics: Collision or Smooth Transition
Efficient pricing starts with valuation metrics. In the private markets, particularly among unicorns – companies valued at $1 billion or more – valuations rely heavily on comparable company analysis with significant adjustments for illiquidity and risk, negotiated funding-round terms, and speculative discounted cash flow models. These “paper” valuations are inherently subjective. They lack the scrutiny of a broad audience that includes short-sellers, financial journalists, shareholder attorneys, and anyone with a cellphone and an X account.
When these companies transition to the public markets, the valuation framework shifts meaningfully. Liquidity, broader investor participation, and real-time price discovery typically produce a valuation uplift. Revenue multiples often compress post-listing as public scrutiny intensifies and profitability paths come under the microscope. Private valuations that prove overoptimistic frequently lead to corrections in the months following the IPO as market reality replaces negotiated optimism. This transition underscores a core strength of public markets: transparency and consensus-driven valuation that ultimately rewards sustainable execution over hype.
In the end, robust capital formation requires strong private and public markets working in balance. These two ecosystems have co-existed with varying degrees of equilibrium, heavily influenced by interest rates, regulation, and investor demand. SpaceX’s IPO arrives at a pivotal moment as these factors have shifted. As one of the largest and most anticipated debuts in history, it will showcase both the enduring strengths of public markets and their ongoing evolution. SpaceX’s journey from private valuation to public pricing will remind us that, even amid structural changes, our public markets retain their fundamental value: genuine price discovery. For companies, investors, and the broader economy, that process remains indispensable.
** “The $4T AI IPO Wave, 2026’s Unicorn Economy”, All In Podcast, June 4, 2026
