Great IPO reopening may be on hold: Rising rates and low stocks are deadly for IPOs.
The combination of still-high valuations, mediocre reception for the latest crop of IPOs and poor market conditions could force a halt to The Great IPO Reopening.
instacart Its opening price dropped below $30 before closing at $30.65 on Thursday. Arm Holdings dropped from an opening price of $51 yesterday before closing at $52. Clavio It hit $31.30 when it opened on Thursday, just above its opening price of $30, before closing at around $34.
And what about the previous crop of IPOs? not that good.
restaurant chain To move a horse around in a circle The first one to get everyone excited was the IPO in June. It was priced at $22, opened at $42 and rose to $55 shortly thereafter. It is now at $30, which is still above its opening price and has been the victim of a massive selloff over the past two weeks.
kenviewThe Johnson & Johnson spinoff, which went public in May at $22, traded as high as $20 for a few months, and is now down from its opening price of $22.
cosmetics firm weird technology The price was $35 in July, opened around $49, and is now at $28, significantly lower than its opening price of $32.
Take into account seasonal weakness and macroeconomic concerns, particularly higher interest rates, and it’s possible that many IPO executives hoping to go public in October or November are biting their nails.
Unfortunately, the alternatives aren’t very attractive.
Now bad news outweighs good news
The good news: Deals are being made.
The bad news: These startups are strong, and their average reception, even with small floats, doesn’t bode well for the hundreds of tech IPO hopefuls, most of whom aren’t profitable and still get massive cuts. Would like to avoid. This will be essential to successfully float them in the public markets.
I noted earlier in the week that there was widespread agreement that a successful IPO candidate: 1) should be profitable or be on a very clear path to profitability, and 2) should have a low valuation.
The bad news is that some of these tech unicorns may face huge public cuts. I spoke earlier this week with Nizar Tarhuni, vice president of research at PitchBook, who estimated that there are about 800 or so tech unicorns that haven’t raised capital in more than 17 months, on average.
“They will need to raise funds soon and the pricing dynamics do not look very good,” he told me.
This leaves those unicorns with three options: 1) raise additional capital in the private markets, 2) merge or be bought out; or 3) move to the public markets.
Tarhuni said venture capital firms still have dry powder, but they will focus on helping companies with the highest chance of success. In this environment, that means companies that are already making operating profits.
what about the rest? Those that cannot or will not successfully meet the criteria to go public and continue to raise private capital will be forced to merge or be bought out. This means there is a lot of potential business for distressed M&A firms.
Ultimately, a small percentage will take their medicine and go to the public markets (some may take the SPAC route), but they will have to accept lower valuations.
Macro outlook is the real IPO killer
This month, the 10-year yield has risen from 4.10% to 4.48%, an increase of nearly 40 basis points. (one basis point is 0.01%). The S&P 500 is down 2.7% in September.
That combination – rapidly rising rates and a declining stock market – is the classic IPO killer.
This comes just as the next generation of IPO hopefuls are hoping to go public in mid-October.
Hopefully, by then interest rates will cool down and stocks will overcome the seasonal weakness of September and October.
But if instead the 10-year yield rises 40 basis points (closer to 5%), and the S&P 500 drops 2.5%-5% or more, then many IPO hopefuls will postpone that decision.
(TagstoTranslate)Markets(T)Breaking News: Markets(T)Stock Markets(T)Investment Strategy(T)Wall Street(T)Instacart (MapleBear Inc)(T)Arm Holdings PLC(T)Arm Holdings PLC(T)Clavio Inc(T)Audity Tech Ltd(T)Kenview Inc(T)CAVA Group Inc(T)Business News