By Emily Bary
Experts say private market valuations need to fall and tech stocks need to rise for new issues to bounce back from their lowest annual proceeds in more than three decades
The IPO window has closed in 2022, and experts don’t want to bet on it reopening anytime soon.
After record-breaking deal activity in 2021, fueled by special-purpose acquisition companies or SPACs and easy money, the market cooled sharply in 2022. The SPAC craze abated as blank check companies struggled to find suitable merger targets, while companies contemplating traditional IPO debuts largely went into hibernation.
According to data from Renaissance Capital, a provider of pre-IPO research, there were only 71 traditional IPOs or direct listings with a market capitalization of at least $50 million in 2022, compared to 397 in 2021. The total number of issues was the lowest level since 2009.
The drop in IPO proceeds was even more staggering. Those 71 deals totaled just $7.7 billion, down 95% from 2021’s $142.4 billion and the lowest level in more than three decades.
These trends are unlikely to change in the short term, experts say, after a perfect storm of rising inflation, rising interest rates and the war in Ukraine brought the IPO market to a halt. It will take some time for the inflation and interest rate environment to improve enough for the IPO market to become more hospitable, after which companies would need to come up with solid numbers and start their preparations.
That’s why there’s likely to be “very subdued” IPO activity in the first half of 2023, according to Rohit Kulkarni, an analyst covering technology companies for MKM Partners.
“Typically, companies want to go public at their best,” he noted, meaning they will aim to show “some degree of inflection in their financial results.”
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The first quarter of 2023 is unlikely to bring an environment conducive to that performance, he said. Even if the company’s executives thought IPO market conditions were warmer by April or May, “it would be their turn to kick the can for 90 days” if their first-quarter numbers weren’t up to date.
Kulkarni sees “a possible resumption of somewhat normal IPO action in August” depending on market conditions, but it’s really “everyone’s guess” how things will play out after May.
Then there’s the question of valuations in the technology sector, which have fallen amid rising interest rates and broader concerns about the state of corporate spending. Once inflation and interest rates are better controlled, “the stock market will need to recoup some of the lost valuations,” said Previn Waas, co-head of IPO practice at Deloitte & Touche.
Some parts of the tech industry are down between 60% and 80%, he noted. Executives and board members of private companies probably don’t expect a recovery to peak levels any time soon, but they probably want “some measure of valuation fairness” such as B. a doubling of the ratings compared to the current level.
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Meanwhile, given the current climate, private ratings will likely need to be adjusted before high-profile companies can test the public waters.
“Private companies need to recognize that they need to lower their valuation expectations,” Kulkarni said. “The likely trigger for this would be mutual funds holding shares of these private companies, which could report significantly lower valuations in their annual reports.”
But those reports typically come with a 60-day lag, meaning the market wouldn’t get those signals until mid-Q1.
“It’s a slow process for private markets to respond to the new public norm of things,” Kulkarni said.
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Would-be IPO candidates are also looking to recent returns as a gauge of market health, and headline numbers have not been exactly encouraging in 2022. The IPOs tracked by Renaissance have averaged a negative return of 27% versus the offering price, which is the company’s worst performance on this metric since 2008. The Renaissance IPO ETF (IPO) is down 56.3% so far in 2022, while the S&P 500 index is down 18.6%.
However, according to Avery Spear, Senior Data Analyst at Renaissance Capital, the story is a bit more complex. Part of the reason returns were so poor from an overall perspective was a multitude of “pop-and-drop” IPOs, or small, low-volatile names that saw huge jumps on the first day of trading only to fall later. Addentax Group Corp. (ATXG), a Chinese company, saw its shares initially soar 13,000% before collapsing in the aftermarket, she noted.
Renaissance data showed that the subset of 2022 IPOs that raised more than $100 million generated an average return of 24% excluding AMTD Digital Inc. (HKD), a Hong Kong-based company whose Shares faced volatile trading due to lack of news.
The good news for investors who miss IPO activity is that companies going public may have better fundamentals as they resume after focusing on issues like profitability, internal productivity, and headcount and cost management in this recent lull to have.
“One-size-fits-all economy isn’t always popular, but it’s back in fashion,” Waas said. “Growth at any price is no longer possible.”
Companies eyeing eventual IPOs could also use the time to do small, inexpensive things to ensure they’re ready when the gates open. This includes, according to Waas, closing their books on time and making sure their forecasts are in order.
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When the IPO window reopens, Spear doubts investors will see “the big-loss, fast-growing tech companies” that have dominated for the past few years unless they’re really cash-strapped. Instead, some early candidates could be “bigger, profitable, stable companies.”
Names in the pipeline include Fogo Hospitality, the parent company of restaurant chain Fogo de Chao, which went public in 2015 but was acquired in 2018; Savers Value Village, a thrift store operator; and Bounty Minerals, an energy company, she said.
That’s not to say some growth-oriented names won’t try their luck early on. VinFast, a Vietnamese electric vehicle company, submitted an F-1 earlier this month, and Bloomberg News reported that the company could go public as early as January.
The company is “very, very unprofitable” with “negative gross margins,” Spear said. “That could be a good barometer for tech companies that are making very big losses.”
The 2022 IPO list has been pretty quiet on the tech front. The two largest IPOs of the year, with deals worth at least $1 billion, were Corebridge Financial (CRBG) and TPG Inc. (TPG), both in the financial sector. Mobileye Global Inc. (MBLY), merging from Intel Corp. in October (INTC) spin-off autonomous driving company, ranked third with a deal size of $861 million.
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As for the hot tech names to hope for in 2023? This crowd might not be all that different from MarketWatch’s 2022 watch list. Names like Databricks, Reddit and Plaid did not go public during the frigid climate of the past 12 months, but they are among those to watch again in the new year should conditions improve.
Representatives from Plaid and Databricks declined to comment on IPO plans, while a Reddit representative did not respond to a request for comment.
Investors can also keep an eye on Fanatics, an athletic apparel and collections company, which was valued at $31 billion in early December.
“An IPO remains our medium-term priority,” a company spokesman told MarketWatch. “Meanwhile, we are more focused on continuing to build a great company focused on serving our fans and adding value to the league, teams and player associations we serve every day.”
-Emily Bary
(ENDS) Dow Jones Newswires
12/24/22 1012ET
Copyright (c) 2022 Dow Jones & Company, Inc.
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