The IPO market has lagged so far in 2022, with recent data from Connecticut-based IPO investment management and research firm Renaissance Capital LLC showing fewer than 20 U.S. companies have launched since the beginning of the year. According to Phil Haslett, EquityZen’s co-founder and chief strategy officer, several factors are contributing to the slowdown in IPOs.
“Well, it’s a number of things [causing the pullback in number of IPOs] and really just a perfect storm,” Haslett told Yahoo Finance Live. “You have global instability with what is going on in Ukraine. You have inflation uncertainty. And you also just experienced a big drop in many sectors, mainly technology. When you put all of that together, you get a lot of volatility, and volatility is kryptonite for IPOs.”
Haslett took to Yahoo Finance Live to talk about the slowdown and volatility in the IPO market. EquityZen is a New York-based company that operates an online marketplace for trading premarket employee stocks of privately held companies. The platform offers accredited investors access to company-approved pre-IPO technology investments through their mutual funds.
Last year was a record year for IPOs, with low interest rates serving as a catalyst for nearly 400 US debuts to raise over $140 billion, according to Renaissance Capital. The 18 companies that have gone public so far in 2022 have only managed to raise around $2 billion in total. Additionally, the performance of stocks that went public in 2021 has been lackluster — the average 2021 IPO is more than 20% below its issue price, according to Nick Einhorn, research director at Renaissance Capital.
The market correction in inflated valuations of companies that debuted last year has encouraged some pre-IPO companies to reassess their value. For example, Instacart recently made headlines when it cut its own valuation by nearly 40% to $24 billion.
The story goes on
“I absolutely think this is just the tip of the iceberg,” Haslett said. “I think it was a really smart move by Instacart to come out and say, look, we’re not really a $40 billion company when you compare us to our public competitors. We really are a $24 billion company. Why punish our employees and get $40 billion worth of stock just to bring down the market? So I think it’s something they did upside down beforehand, which I thought was really smart, and it’s going to lead to some other ventures [to do the same].”
Smartphone with the Instacart logo displayed is seen in this image dated March 25, 2022. REUTERS/Dado Ruvic/Illustration
SPAC raid
Now that the SEC is proposing new guidelines that would negate the advantages of special purpose acquisition entity (SPAC) mergers over traditional IPOs, even more uncertainty looms for private companies looking to go public. SPAC mergers accounted for a majority of new listings in 2021, and the prevalence of SPAC listings increased nearly 150% over the past year compared to 2020.
The SEC’s proposed guidelines would eliminate the “safe harbor” protections that allow companies acquired through a SPAC to make more forward-looking statements than are permitted for traditional IPO issuers. The new rules would also require more extensive disclosures to investors about potential conflicts of interest between SPAC sponsors and target companies.
“A lot of SPACs that would normally have approached these companies are coming under more scrutiny and are having a really difficult decision to make,” Haslett said. “Well I think so [slowdown] will be something sustainable. The kind of key indicator we’ll be looking at to see if the window opens up a bit wider again is when you see some of these leading tech names – so think companies like Peloton (PTON), Zoom (ZM) , DocuSign (DOCU) – Start trading back slightly above pre-pandemic levels to show the worst may be behind us.”
Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV
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