The Great IPO Reopening could be put on hold because of rising rates and falling stocks.
A combination still-high valuations of the latest crop of IPOs, a mediocre response to them and poor market conditions could force The Great IPO Reopening be put on hold.
on Thursday broke below its initial price of $30 before closing at $30.65. Arm Holdings yesterday closed at $52 after breaking below its initial $51 price. Klaviyo hit $31.30 when it opened on Thursday, barely above its initial price of $30, before closing at almost $34. What about the previous crop of IPOs, then? It’s not so good. In June, the first IPO that got everyone excited was Restaurant Chain
. It was priced at $22, launched at $42, then went up to $55 soon after. The stock is now $30, which is still higher than its original price due to massive selling in the last two weeks. Kenvue, the Johnson & Johnson spinoff, went public in May at $22, traded in the high $20s for a couple months, and has now broken below its initial price of $22. Oddity Tech
, a cosmetics firm, priced its stock at $35 in July. It opened around $49. Now, it is $28. This is well below the $32 price. Throw in the seasonal weakness and macroeconomic worries, particularly higher interest rates, and it’s likely many executives of IPO hopefuls who are looking to go public in October or November are chewing their fingernails.
Unfortunately, the alternatives are not very appealing. The bad news has now overtaken the good.–The positive news is that deals are being made. The bad news is that these early companies, even though they have tiny floats are strong and their mediocre response does not bode very well for hundreds of tech IPO candidates, many of whom do not make money and want to avoid the massive cuts necessary to successfully float in public markets. I noted earlier this week that a majority of people agreed that a successful IPO would require that the company be either profitable or have a clear path to profitability. It also needed to be valued lower.
The unfortunate news is that some of these unicorn tech companies will probably not take a big public haircut. Nizar Tarhuni is the vice president of Pitchbook’s research. He estimated that there were about 800 tech unicorns who, on average, hadn’t raised any capital for more than 17 month. “They will need to raise capital soon, and the pricing dynamics do not look good,” he said. This leaves unicorns with only three options: 1) raise more capital on the private market, 2) merge or get bought out or 3) go public.
Tarhuni said that venture capital firms have dry powder but will focus on the companies that are most likely to succeed. In the current environment, this means that companies are already making an operating profit. The companies that do not meet or refuse to meet the criteria for successfully going public, and those who cannot continue to raise private capital, will be forced to either merge or be purchased. This means that distressed M&A companies have a lot of business to do. The final group will accept the lower valuation and take the plunge into the public markets. Some may even go the SPAC route. The macro outlook is what kills IPOs
A basis point is equal to 0.01%. S&P 500 was down 2.7% for September. This combination of rapidly rising interest rates and a declining stock market is a classic IPO killer. This is just as the next batch of IPO hopefuls are preparing to go public by mid-October. By then, interest rates should have settled down and the stock market will be past its seasonal weakness in September and October. If instead, the 10-year yield rises another 40 basis points to near 5% and the S&P 500 falls another 2.5%-5% more or so, many IPO hopefuls will postpone their decision.