IPOs are back — but investors should keep their excitement in check

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The author is a former investment banker and author of Power Failure: The Rise and Fall of an American Icon.

With the Nasdaq up more than a third so far this year and other stock markets also performing well, it’s no surprise that greedy investment bankers are busy reviving the ailing IPO market.

IPOs are, of course, in some ways an indicator of the health of the stock markets. Investors’ level of risk-taking in a company’s initial stock offering has long been considered the litmus test of market sentiment.

IPOs are also usually lucrative for bankers, with subscription fees amounting to up to 7 percent of the money raised. However, these are negotiable and larger deals are usually made at a cheaper rate.

Still, the incentives for Wall Street bankers to take IPOs and then go overboard are as strong as ever. “The new issue market is doing better than it did in 2022, although we’re a long way from where we used to be,” said Michael Wise, vice chairman of equity capital markets at JPMorgan Chase.

The problem is that many of the IPOs conducted in 2021 and 2022 are trading below their IPO prices, according to Wise. This infuriates institutional investors and discourages them from buying new issues unless they are cheaply priced and come from companies with established track records. “It’s a slow healing process,” he says.

Wall Street has been only too happy to heed the demands of burnt-out investors and is proceeding cautiously — with large spinoffs of established public companies like Volkswagen, AIG, GE and Johnson & Johnson.

Last September, Porsche was partially listed by VW at a valuation of $72 billion. Around the same time, AIG completed the approximately $13.5 billion minority interest IPO of Corebridge Financial, a pension company. Then in January, as part of its plan to split into three and then disappear as a conglomerate, GE spun off 80.1 percent of its healthcare division as GE HealthCare Technologies, Inc., as of about $34 billion now — and the stock is up up 30 percent so far this year.

Although the company’s stock was up 19 percent a few months ago, in April, few investors are complaining. And the underwriters, led by most of the Big Five Wall Street banks, all had a good story to tell investors about how markets began to pull out of the 2022 doldrums in early 2023.

Next came the carve-out IPO of Kenvue, J&J’s consumer brand business (think Band-Aids). Kenvue, underwritten by Goldman Sachs, JPMorgan Chase and Bank of America, went public in May at a valuation of $41 billion. Three months later, the company is worth $45 billion, up about 10 percent since the IPO.

Wall Street revs up the IPO factory. Cava, the Mediterranean restaurant chain, went public in June at a list price of $22; Since then, the stock is up 134 percent.

Then came the IPO of Oddity Tech, the acclaimed Israeli beauty and wellness company. With the help of underwriters Goldman Sachs, Morgan Stanley and Allen & Co., Oddity Tech came off the shelves. At $35 per share, the stock is trading at about $50 per share a month later, with a market value of nearly $3 billion. That turned out to be an important deal for the stock markets. “If you don’t push the envelope, are big enough, and make money, you can successfully go public,” says Wise.

This IPO enthusiasm is expected to continue into the fall. “Beast spirits are emerging right now,” says another senior Wall Street capital markets banker. “There’s no doubt about that.” The shoe company Birkenstock is preparing for an IPO in September with a volume of at least 1.5 billion US dollars. Arm, SoftBank’s chipmaker, is also hoping for a profit of at least $5 billion in September.

But not all who file an IPO make it to the public market. Digital marketing firm Aleph Group — which counts Meta, Microsoft and Spotify among its clients — withdrew its estimated $300 million IPO in July, claiming its decision was based on “the public interest and investor protection.” “.

Ultimately, the new issue market, like so many aspects of Wall Street, is a game of guesswork. Trust is slowly built by insuring incumbents and pricing them appropriately. The successes of Cava and Oddity Tech, which have been profitable and not too insanely priced, are helping restore investor confidence and encouraging some risk-taking.

However, there is always a question as to whether investors can balance their greed and fear of missing out. That wasn’t possible during the last boom cycle. It will be interesting to see if they can hold back this time.