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The US IPO market is finally reopening after the sleepiest spell in 32 years. Grocery delivery service Instacart, data automation provider Klaviyo and semiconductor designer Arm Holdings Ltd. all applied for their IPO last week. And when these deals go smoothly, the general consensus is that others will follow. That’s probably true, but it could be years, if ever, for the market to get back to its former sizzling.
First, consider what Jay Ritter, a finance professor at the University of Florida, calls the market’s unrealistic “anchoring” to valuations from a few years ago. At the height of the 2021 bull market, companies — and technology firms in particular — were going public at such extraordinary valuations that it left issuers with a permanent hangover. Companies are finding it difficult to accept that today’s price-to-sales ratios do not match those received by their industry peers 24 months earlier. Venture-backed companies, in particular, are trying to avoid so-called down rounds — or raising money when valuations are falling — and that’s exactly what some companies would get by entering the market now.
According to Ritter’s data, the average tech IPO in 2021 took place at an offer price of 15.2 times sales, the highest multiple since the peak of the dot-com bubble in 2000 — a level of foam that’s likely not so will return quickly, especially not Federal Reserve interest rates are still at their highest levels in two decades. “In my estimation, we are still in a multi-year slow IPO market,” Ritter told me over the phone on Monday. If they could, companies would prefer to stay private and perhaps raise more venture capital, although the funding can involve bells and whistles — usually embedded options — that keep investors happy without them having to officially register downside funding, Ritter said.
The drought is much more about supply than demand, but IPO bankers may also need to make amends if they also want to lure investors back. Bankers face the difficult task of balancing the interests of their corporate clients (who want to sell at high prices and avoid the perception of “leaving money on the table”) with the interests of institutional IPO buyers (who expect positive returns). . In the latter group you will not find many satisfied customers lately. From the sample of U.S. IPOs in 2021 that raised $500 million or more, median supply is down 23% to date, Bloomberg data shows.
Second, history offers another reason to put IPO optimism on the back burner. There have been a number of pronounced IPO slumps over the past five decades, and all of them took at least a few years to recover. The inflationary period of the 1970s offers an obvious (if highly imperfect) comparison given the supposed macroeconomic similarities. Wild swings in consumer prices and interest rates sent price-to-earnings multiples soaring, making it far more difficult for buyers and sellers of IPOs to reach consensus on companies’ values. Hence, IPO activity was abysmal from around 1974 to 1980. When the market finally reopened, it was a stop-and-go affair. According to Ritter’s data, IPO proceeds recovered significantly in 1981, but the market cooled again in 1982. Finally, in 1983, a new boom ensued, fueled by the enthusiasm for personal computing and the Microsoft Corp. IPO. and Oracle Corp. continued growling . and Sun Microsystems in 1986.
IPOs also took time to recover from the dot-com bust and the global financial crisis. In the first case, gross proceeds recovered significantly after about three years, in the second case it took about two years.
Of course, there are key differences between those episodes and today. In the 1970s, it took until July 1980 (seven years) for the S&P 500 Index to regain the highs of January 1973. from March 2000 to May 2007 it was another seven years; and from October 2007 to March 2013 it took about five and a half years to get back to the top. In 2023, on the other hand, the market is down nearly 7% from the January 2022 peak after just 20 months. Should valuations continue to rise, that would mean that the IPO rebound is likely to pick up some momentum.
But there is a third problem that has little to do with fluctuations in market prices. Despite the explosive activity in 2021, the number of IPOs has been in secular decline since the peak of the dot-com bubble.
As Marshall Lux and Jack Pear noted in a 2018 Harvard Kennedy School working paper, the continued decline in small IPOs (less than $100 million at 2017 prices) in contrast to mid-size offerings ($100 million to $500 million) seems dollars) to be the most notable ) and large-cap deals (which are rare enough that a handful of deals can skew the data in any given year). Likely drivers include the investment industry moving towards more passive strategies; the growth of venture capital and private equity as alternatives in the public market; and the increasing regulatory demands on publicly traded companies since the Sarbanes-Oxley Act of 2002. Whatever the exact trigger, the number of publicly traded US companies has plummeted since the late 1990s and has never recovered.
Granted, there’s one scenario in which the IPO market could break out of its ongoing doldrums: artificial intelligence could theoretically spawn as many exciting new stock offerings as did the dawn of personal computing in the 1980s or the internet boom in the 1990s. In times of great innovation, the US IPO market will always play an important role, and AI could be another technology of this kind – if the hype is to be believed. But until then, the US IPO market will likely have a hard time resuming its glory days.
More from the Bloomberg Opinion:
• Instacart IPO filing comes with red flags: Dave Lee
• VinFast’s $190 billion value screams silly SPAC: Chris Bryant
• The world’s largest IPO market is not healthy: Shuli Ren
This column does not necessarily reflect the opinion of the editors or of Bloomberg LP and its owners.
Jonathan Levin has worked as a journalist for Bloomberg News in Latin America and the US, covering finance, markets and M&A. Most recently, he served as the company’s office manager in Miami. He is a CFA charterholder.
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