Could the IPO hangover finally be over?
The conditions suppressing the IPO market since 2021 appear to be subsiding.
Dormant since 2021, the market for initial public offerings (IPOs) has woken up. IPO tracker Renaissance Capital reports that some 52 companies have gone public this year—already nearing the number of all of 2022. We have a ways to go to reach the level of the 2021 bubble, but progress is progress. This summer, shares of a fast-casual restaurant company rose substantially after its IPO; Renaissance Capital called it the biggest pop for an IPO since 2021.
How we got here
During the boom year of 2021, more than 700 IPOs were priced, raising hundreds of billions of dollars. It didn’t matter then if a candidate was unprofitable—simply the hope of a future return in a near-zero interest-rate environment was enough to entice investors. The rewards were rich, which encouraged more companies to go public, which further riled up markets—you get the picture.
Everything changed when the Federal Reserve began to raise rates. The market ground to a standstill in short order. In 2022, we saw only 70 IPOs priced, raising less than $10 billion—the worst year since the global financial crisis. For almost two years now, the public offering space has languished in one of its worst bear markets in recent memory.
A flurry of dealmaking
The IPO market has sprung to life recently. Renaissance’s IPO index has rocketed more than 40% year-to-date, with most gains occurring after June 1. Although none have been mega deals, the willingness of companies to come to market is a fundamental (and encouraging) shift from just a few months ago. It’s no accident this has taken place in conjunction with a generally more favorable economic backdrop. Inflation finally appears to be under control. Equity valuations are up, especially in the high-growth pockets of the market. Volatility has been on the decline for most of the year, with the VIX at its lowest level since the start of the pandemic.
Any remaining hang-ups in the IPO market likely are a matter of supply, not demand. The biggest issue facing companies looking to go public is that the valuations of comparable publicly traded companies remain far below the peak levels of 2021. That’s a problem when many businesses raised capital at those euphoric highs while private and likely will be forced to lower their valuations.
A broader perspective
What does the future hold? We think the back half of this year will see a number of higher-quality names go public—the very sort of long-term value creators we focused on at Kaufmann. But we’re in the early innings. It will take some time before the IPO market can be considered in full-blown recovery mode. When the story of the 2023 is written, we expect it to be seen as a relatively quiet year during which the market absorbed the 2021 boom and the 2022 bust and returned to some semblance of normalcy.
Take heart in the fact that a slow and steady comeback is healthy. When it happens too quickly, you get 1998. How many Dot-coms went public? (A lot.) How many survived? (Not many.) The natural churning process leads to new ideas addressing society's problems with potentially profitable solutions. This is the time when good companies must have durable business models as they will certainly be tested.