The IPO market is poised for its worst year in decades, leaving young companies with little choice but to burn money while waiting for the stock market to calm down.
Late last year, hundreds of companies were in the final stages of preparation for IPOs, encouraged by the best 18 months ever for US IPOs. Then a combination of factors – sky-high inflation, rising interest rates and Russia’s invasion of Ukraine – sent shockwaves through the stock market.
The IPO pipeline is frozen. So far this year, traditional IPOs have raised just $5.1 billion, according to data from Dealogic. According to Dealogic data going back to 1995, traditional IPOs have typically raised around $33 billion at this point in the year. Last year, those offerings grossed more than $100 billion at this point.
The last time levels were this low was in 2009 as the US recovered from the depths of the financial crisis and the IPO market reopened towards the end of the year.
IPO advisors say they don’t expect 2022 to follow that pattern, meaning it could end up being the worst year for IPO fundraising since Dealogic, a research firm, started tracking it in 1995.
Fintech firm Klarna Bank AB was a highly-anticipated IPO in 2022, but instead of making a sparkling debut, the Sweden-based company laid off hundreds of employees to cut costs and was forced to fund itself in private markets . Klarna, which specializes in buy-now, pay-later services, managed to raise $800 million this summer — but only after cutting its valuation by 85% to $6.7 billion.
That rating is still three times Klarna’s three years ago, a Klarna spokeswoman said.
StockX, an online marketplace that sells sneakers, streetwear and other items, had planned to go public as early as the second half of 2021, people familiar with the matter told The Wall Street Journal last year. But StockX has yet to file IPO papers. In June, the company laid off 8% of its workforce. The company declined to comment.
Fewer companies going public is usually seen as bad news for the economy and investors.
An IPO, especially if a company is younger and has more room to grow, can allow more retail investors to take advantage of future gains. Listed companies are required to register with regulators and provide more transparency about their finances. Big-name IPOs tend to be the kind of high-growth companies that propelled the stock market for a decade after the financial crisis.
Bankers and lawyers working on IPOs said companies that decide to brave an IPO in the fall or early winter this year may have to halve their valuations after two years of raging markets that left retail investors in the dark invested money in loss-making companies at sky-high valuations.
Top IPO lawyers say they have “pencils down” for nearly all of their expected deals this year, and some companies targeting IPOs in 2023 are wary of hiring bankers.
Denny Fish, a portfolio manager at Janus Henderson Investors, typically buys stocks in growth companies when they go public. He said he doesn’t plan to participate in IPOs until 2023 at the earliest. “It might feel a little better because the market rallied in July, but there’s still so much uncertainty,” Mr. Fish said. “There just isn’t a market for companies going public right now.”
As of Friday, the tech-heavy Nasdaq Composite was down 19% in 2022. That’s higher than its mid-June low, when the index traded down more than 30% for the year.
Big-name cryptocurrency startups, food delivery companies, and financial technology companies are among the companies planning IPOs for 2022. As time goes by and their cash reserves dwindle, companies may have to tighten their belts as funding becomes more difficult.
Some, like fast-delivery startup Gopuff, are cutting costs by laying off employees. Grocery delivery company Instacart Inc. and payments company Stripe Inc. have lowered their private ratings. Others have had to raise new money at deep discounts to previous funding rounds.
Many fund managers agree with Mr. Fish. Those who bought shares in the blockbuster IPOs of 2020 and 2021, including trading platform Robinhood Markets Inc., electric vehicle maker Rivian Automotive Inc., and restaurant software provider Toast Inc., are suffering big losses.
Even though the IPO market isn’t healthy right now, many companies still have a burning desire to go public, bankers say. Some need the money. Others are running against a ticking clock for restricted stock units issued to employees through vesting plans. And some are looking to make acquisitions but need stock or cash to close deals.
“I don’t think a lot of companies that are currently private thought they would be private now,” said Barrett Daniels, U.S. IPO co-head at accounting firm Deloitte LLP.
He said companies in need of cash, particularly founder-led companies, may be struggling with the lower valuations their companies could now command. “It’s a really, really hard pill to swallow. Going backwards is hard to calculate,” he said.
There are a handful of companies poised to go public in 2022, people familiar with the matter said, including Intel’s self-driving car division Mobileye, Instacart and Corebridge Financial, an offshoot of American International Group.
Other deals, including Arm from SoftBank Group Corp., a chip design specialist after its failed sale to Nvidia Corp., are expected within the first few months of 2023, people familiar with the matter say.
The reasons for the IPO drought are varied. Late last year, fears of inflation and subsequent Federal Reserve rate hikes spooked investors, who poured money into companies that promised big growth but had little or no actual earnings. High-growth companies were sold and fears of inflation mounted, with many analysts warning of an imminent recession, which also pushed shares of profitable companies lower. The economy contracted for two consecutive quarters at an annualized rate, a common definition of a recession, and volatility rose.
Fund managers ducked and tried to protect themselves from big losses, which meant not taking on the additional risk associated with newly listed companies.
Meanwhile, IPO advisors and investors agree the IPO playbook is changing: They say the first companies to go public after markets settle down should be profitable, fairly large, and “own” names Must – Companies that are well known and leaders in their specific industry.
Many private companies are taking note of this. For example, thanks in part to cost cutting, Instacart was profitable under generally accepted accounting principles in the second quarter of this year, according to a person familiar with the matter. Instacart’s revenue rose 39% year-over-year to $621 million for the three months ended June, investors told The Wall Street Journal, the highest quarterly revenue in Instacart’s history.
Though some companies, including Klarna, have been forced to face a severe valuation cut because they needed to raise more cash, many others are yet to suffer from cash because they raised big bucks in 2021 before the market turned. According to research firm PitchBook, US venture-backed companies raised nearly $330 billion last year, nearly double the previous record set in 2020.
Although the stock market has bounced back and some secondary stock offerings have performed well, bankers are concerned about what a poorly performing new offering could mean for the IPO market.
In May, Bausch + Lomb Corp. went public when virtually nobody did and investors were largely uninterested. The eye-care company valued its stock at $18 per share, well below its expectations. It was valued at about $6.3 billion, less than half of what the company was hoping to hit just months earlier, people familiar with the matter said. A company spokeswoman declined to comment. Now the stock is trading at around $15.50 per share.
By WSJ
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