The IPO market froze in 2022. Here’s what’s needed for it to thaw in the new year

By Emily Bary

Private market valuations need to come down, and tech stocks need to rise for new issuances to return from lowest annual proceeds in more than three decades, experts say

The window for initial public offerings slammed shut in 2022, and experts are unwilling to bet on a swift reopening.

Following record-breaking deal activity in 2021 buoyed by special-purpose acquisition companies, or SPACs, and easy money, the 2022 market cooled in a big way. The SPAC craze waned as the blank-check companies had difficulty finding suitable merger targets, while companies that considered traditional IPO debuts largely headed into hibernation.

There were just 71 traditional IPOs or direct listings in 2022 that had market capitalizations of at least $50 million, compared with 397 in 2021, according to data from Renaissance Capital, a provider of pre-IPO research. The total number of issuances was the lowest level since 2009.

The decline in IPO proceeds was even more staggering. Those 71 deals brought in just $7.7 billion in aggregate, 95% below the $142.4 billion seen in 2021, and the lowest level seen in more than three decades.

Those trends aren’t likely to change in the short term, experts say, after a perfect storm of surging inflation, rising rates and war in Ukraine ground the IPO market to a halt. It will take time for inflation and the rate environment to improve in a way that makes the IPO market more hospitable, and after that, companies would need to line up solid numbers and get their preparations in order.

For that reason, the first half of 2023 is likely to see “highly muted” IPO activity, according to Rohit Kulkarni, who covers tech companies as an analyst for MKM Partners.

“Typically, companies want to go public with their best foot forward,” he noted, meaning that they’ll be aiming to show “some level of inflection in their financial results.”

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It’s unlikely that the first quarter of 2023 will bring the sort of environment conducive to that performance, he said. Even if company executives deemed IPO market conditions to be warmer by April or May, “it would behoove them to kick the can down the road 90 days” if their first-quarter numbers were not up to snuff.

Kulkarni sees “a possible resumption in somewhat normal IPO action in the August time frame,” depending on market conditions, but really it’s “anyone’s guess” how things will play out beyond May.

Then there’s the question of valuations in the tech sector, which have been hammered amid rising interest rates and broader concerns about the state of corporate spending. Once inflation and rates are better under control, “the stock market has to recover some levels of valuations lost,” said Previn Waas, the co-leader of the IPO Practice at Deloitte & Touche.

Some portions of the tech industry are down anywhere from 60% to 80%, he noted. Executives and board members of private companies probably aren’t expecting a recovery back to peak levels soon, but they likely want to see “some level of valuation fairness,” such as a doubling of valuations from where they are currently.

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Meanwhile, private valuations probably need to rightsize in light of the current climate before high-profile companies can test the public waters.

“Private companies would need to acknowledge that they need to reduce their valuation expectations,” Kulkarni said. “The trigger for that would likely be mutual funds that hold stock in these private companies, which could start to report significantly lower valuations in their year-end reports.”

But those reports tend to come on a 60-day lag, meaning the market wouldn’t get these signals until the middle of the first quarter.

“It’s a slow process for private markets to react to the new public norm of things,” Kulkarni said.

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Would-be IPO candidates also consider recent returns as a gauge of market health, and the headline numbers weren’t exactly encouraging in 2022. The IPOs tracked by Renaissance averaged a negative-27% return on average from the offer price, making for the worst performance on that metric since 2008. The Renaissance IPO ETF (IPO) has declined 56.3% so far in 2022, while the S&P 500 index has dropped 18.6%.

The story is a bit more layered than that, however, according to Avery Spear, a senior data analyst at Renaissance Capital. Part of why returns were so poor from a big-picture perspective were a host of “pop and drop” IPOs, or small, low-float names that saw huge jumps on the first trading day only to tank later on. Addentax Group Corp. (ATXG), a Chinese company, saw its shares rocket 13,000% initially before collapsing in the aftermarket, she noted.

Renaissance data showed that the subset of 2022 IPOs that raked in more than $100 million averaged a 24% return, when excluding AMTD Digital Inc. (HKD), a Hong Kong-based company whose shares were subject to volatile trading on an absence of news.

The good news for investors missing out on IPO activity is that when it resumes, the companies going public could have better foundations after having spent this latest lull focusing on issues like profitability, self productivity, and head count and expense management.

“Unit economics are not always popular, but they’re back in fashion,” Waas said. “It’s no longer growth at all costs.”

Companies eyeing eventual IPOs could also use the time to do little, inexpensive things to make sure that they’re ready once the gates open. Those include closing their books on time and making sure their forecasts are in order, according to Waas.

See also: Banks posted record $10 billion in IPO revenues in 2021, even as average investors faced worst returns in years

When the IPO window reopens, Spear doubts that investors will see “the fast-growing, large-loss tech companies” that dominated in past years, unless they’re truly strapped for cash. Instead, some early candidates could be “larger, profitable, stable companies.”

Among names in the pipeline are Fogo Hospitality, parent company of the Fogo de Chao restaurant chain that 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, filed an F-1 earlier this month and Bloomberg News reported that the company could go public as soon as January.

The company is “very, very unprofitable” with “negative gross margins,” Spear said. “That’s one that could be a good barometer for tech companies that have very large losses.”

The 2022 slate of IPOs was fairly quiet on the tech front. The two largest IPOs of the year, with deal sizes of $1 billion or more, were Corebridge Financial (CRBG)and TPG Inc. (TPG), both in the financials sector. Mobileye Global Inc. (MBLY), the autonomous driving company spun back out of Intel Corp. (INTC) in October, ranked third with a deal size of $861 million.

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As for the hot tech names to hope for in 2023? That crowd might not look all that different from MarketWatch’s 2022 watch list. Names like Databricks, Reddit and Plaid didn’t go public during the icy climate of the past 12 months, but they’re among those to look out for again in the new year should conditions improve.

Representatives from Plaid and Databricks declined to comment on IPO plans, while a representative from Reddit didn’t respond to a request for comment.

Investors can also keep an eye on sportswear and sports collectibles company Fanatics, which fetched a $31 billion valuation earlier in December.

“An IPO remains our intermediate-term priority,” a company spokesperson told MarketWatch. “In the meantime, we are more focused on continuing to build a great company that’s focused on delivering for our fans and adding value to the league, teams and players associations we serve every day.”

-Emily Bary

(END) Dow Jones Newswires

12-24-22 1012ET

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