More U.S. companies looking for fresh capital are turning to private investments or looking for potential buyers as volatile stock markets prevent them from going public.
Falling valuations and unpredictable market swings have led to a sharp decline in listing activity that experts say will take several months to rebound, but private fundraising continues at near record pace.
The benchmark S&P 500 stock index has fallen 5% year-to-date, with the type of high-growth companies that dominate IPOs hit particularly hard. Shares of nearly all of the biggest IPOs of 2021 have fallen dramatically from their early highs, with several including Rivian and Bumble dropping more than 50%.
Although markets have recouped some of their losses over the past week, the scale of recent swings – the S&P has moved more than 1% in either direction on a third of trading days this year – means that few advisers expect a quick rebound in IPO volumes. .
“Everything is on hold at the moment,” said Derek Dostal, capital markets partner at law firm Davis Polk. “A traditional roadshow lasts one to two weeks – who wants to hit the road for two weeks when the market is everywhere?”
Just 13 companies raised $2.1 billion in U.S. IPOs this year, according to Dealogic data, compared to nearly $20 billion in the same period in early 2021. Multiple deals were rolled over in the short term, and nine of the 13 that were terminated did so at or below the bottom of their target price ranges. Just one company – private equity firm TPG – has raised more than $250 million.
“The only thing [the IPO market] The hardest part is the uncertainty that comes with volatility,” said the head of equity capital markets at a major investment bank. “Generally, things are [being] pushed in the second quarter.
Any company that does not launch its IPO by next week will be required to provide full annual results rather than figures for the first three quarters of 2021, which will present a practical new delay for companies that had planned to register in January.
The number of special purpose acquisition IPOs has also fallen precipitously, with less than $6 billion raised so far this year, compared to $26 billion in January 2021. Firm partner Adam Fleisher of attorneys Cleary Gottlieb, said “the Spac fad has clearly passed”, with many companies listed last year now struggling to find targets.
Unlike the moribund IPO market, U.S. private start-ups raised $27.5 billion in funding in January, according to PitchBook data, up from $14.8 billion a year earlier.
Cohesity, a Silicon Valley data management startup that filed for an IPO confidentially last year, recently discussed raising a major private funding round and delaying its listing, said two people briefed on the talks. The company, which investors valued at $3.7 billion in March last year, declined to comment.
Companies that still want to go public also choose to keep their options open with so-called “dual-track” approaches, in which they simultaneously prepare for an IPO and search for potential buyers.
“It means that you are not dependent on any single path. The cost is that you have to pay attention to two very consuming processes,” Fleisher said. “It went down a bit last year because the IPO market was so hot, but now more and more people are choosing this option.”
Several bankers and lawyers have pointed out that there is still a strong pipeline of companies interested in going public once markets calm down. British chipmaker Arm announced its hopes of listing in New York this week, with new chief executive Rene Haas saying the timing of an IPO was “just right”.
However, Paul Taubman, director of boutique investment bank PJT Partners, warned that changing macroeconomic conditions could have a longer-term impact, making it more difficult for companies to raise capital.
He predicted that inflationary pressures, higher labor costs, supply chain disruptions and higher interest rates could create a “new normal” after extraordinary levels of support from the state have helped businesses survive the coronavirus pandemic.
“You see it with the Nasdaq, Spac deals and start-ups,” Taubman said. “A lot of companies are under pressure.”