The IPO parade of the early pandemic years crashed to Earth in 2022, but there are hints of a potential 2023 rebound despite plenty of lingering caution.
Last year the US IPO market “ground to a halt,” according to Renaissance Capital, with only $7.7 billion raised, down a whopping 95 percent from 2021 and a record low since the firm started recording data on companies going public 31 years ago.
The dramatic decline came as financial conditions tightened following US Federal Reserve interest rate hikes and a rout in the stock market.
While worries over the economy have not vanished, last week saw the sort of initial public offering (IPO) buzz that had eluded Wall Street for months, with two notable deal completions.
Nextracker, which provides tracker and software technology for the solar panel industry, raised $638 million through a share offering on the Nasdaq, overshooting its original goal by close to 20 percent.
During the same week, laser sensor manufacturer Hesai raised $190 million in the biggest IPO by a Chinese company in 18 months.
“It’s still well below historical norms, but there’s definitely a pickup,” said Avery Spear, senior data analyst at Renaissance Capital. “Last year, risk was not something that people were looking to take on, IPOs being somewhat inherently risky.”
Some 293 companies are currently registered to go public, up 39 percent compared to this time last year, according to a Nasdaq spokesperson.
In addition, several other well known corporations are also contemplating offerings, namely the payment processing platform Stripe, recently valued at $63 billion; sports merchandising giant Fanatics ($31 billion); and grocery delivery service Instacart ($10 billion).
“There’s a lot of capital that can be deployed, (and) would like to be deployed,” said Mark Roberts, head of capital markets at the Blueshirt Group.
“But there’s going to be more due diligence, and the bar is higher.”
– Window of opportunity? –
Roberts thinks it will take a leap into the IPO realm by one of the big companies contemplating going public in order to revitalize the market.
Renewable energy companies are viewed as especially well positioned for offerings following the passage of the US Inflation Reduction Act in Congress, with nearly $400 billion in tax incentives, grants and loans dedicated to accelerate the transition from fossil fuels.
Nextracker is an example of that trend, as is Israel’s Enlight Renewable Energy, which was already listed on the Tel Aviv Stock Exchange but raised $252 million on Wall Street last week through a share offering.
“Fintech” companies such as Stripe — which seek to disrupt the financial sector with a range of online services — are also experiencing strong interest from investors, according to Roberts.
Seen last year as IPO kryptonite to be avoided at all cost, tech companies have been getting more attention of late, albeit without the prospect of the lofty valuations from a few years back.
“The sky-high valuation multiples we saw in 2021, those are long gone,” Spear said. “The era of easy money is in the rearview mirror at this point.”
Stripe is somewhat of a poster child in this regard, recently pitching a valuation as low as $55 billion, shaving off $40 billion since its 2021 peak.
Interest is especially keen for an IPO linked to the latest and greatest in artificial intelligence following the recent launch of ChatGPT’s splashy chatbot.
However, market watchers are still waiting for a star to emerge.
“There is no real scaled AI company ready to go now that I’m aware of,” Roberts said.
Despite the recent signs of life, the market won’t fully get going until investors are convinced the Fed is done with its current rate hiking cycle, recently warned Jeffrey Solomon, chairman and CEO of Cowen Finance.
Moreover, “market conditions really can just change on a dime,” said Renaissance’s Spear. “If something changes with the Fed rates, if we see any more drastic changes” in the economy, “then that could shut the IPO window again.”
The prevailing viewpoint, according to Roberts, suggests that the second half of 2023 will be more constructive in terms of issuance.
But “there is a minority view that suggests that this is a situation where the window may open for a month. So if you’re a company that wants to go, maybe be ready to go in April or May.”