The IPO market is facing its worst year in two decades. ‘Really hard pill to swallow’

With the IPO market on pace for its worst year in decades, fledgling companies have few options but to burn through cash while they wait for the stock market to calm down.

Late last year, hundreds of companies were in the final stages of preparing to go public, fueled by the best 18 months ever for US initial public offerings. Then a combination of factors—sky-high inflation, rising interest rates, and Russia’s invasion of Ukraine sent shock waves through the stock market.

The IPO pipeline froze. So far this year, the traditional IPO has only raised $5.1 billion, all told, DeLogic data shows. Typically at this point in the year, traditional IPOs have raised about $33 billion, according to DeLogic data going back to 1995. At this point last year, these offerings raised more than $100 billion.

The last time this low was in 2009 was when the US was reeling from the depths of the financial crisis and the IPO market reopened at the end of the year.

IPO advisors say they don’t expect 2022 to follow that pattern, meaning it could be the worst year to raise money in an IPO since DeLogic, a research firm, began tracking it in 1995. Had given.

Fintech firm Klarna Bank AB 2022 had a much-anticipated IPO, but instead of getting off to a great start, the Sweden-based company fired hundreds of workers to cut costs and was forced to seek funding in private markets. Klarna, which specializes in buy-now-pay-later services, was able to raise $800 million this summer—but only after cutting its valuation by 85% to $6.7 billion.

A Klarna spokesperson said that valuation is still three times Klarna’s level three years ago.

StockX, an online marketplace that sells sneakers, streetwear and other accessories, had plans to go public in the second half of 2021, people familiar with the matter told The Wall Street Journal last year. But StockX hasn’t done the IPO paperwork yet. In June, the company laid off 8% of its workforce. The company declined to comment.

Fewer companies going public are generally seen as bad news for the economy and investors.

An IPO, especially when a company is young and has more room for growth, can allow more small investors to benefit from future gains. Publicly traded firms should register with regulators and be provided with greater transparency about their finances. Big-name IPOs are usually the types of high-growth companies that helped the stock market rise for a decade after the financial crisis.

Bankers and lawyers working on the IPO said companies that decide to make a fall or early winter stock-market debut this year may need to halve their valuations after two years of roaring markets. , where private investors had pledged cash in companies losing money in the sky. Evaluation

Top IPO lawyers say they are “penciling down” almost all of their expected deals this year, and some companies looking to have a 2023 IPO are pushing to hire bankers.

Denny Fish, portfolio manager at Janus Henderson Investors, typically buys shares of growth companies in his IPOs. He added that he does not plan to participate in any IPO until 2023 at the earliest. “It may look a little better as the market bounces back in July, but there is still a lot of uncertainty,” Mr. Fish said. “There’s no market for companies going public right now.”

As of Friday, the tech-heavy Nasdaq Composite was down 19% in 2022. This is above the mid-June trough, when the index was trading over 30% for the year.

Notable cryptocurrency startups, food-delivery companies and financial-technology firms are among the companies that planned a 2022 IPO. As time passes and their cash reserves dwindle, companies may need to tighten their belts as financing gets harder.

Some, such as rapid-delivery startup Gopuff, are cutting costs by laying off workers. Grocery-delivery company Instacart Inc. and payments company Stripe Inc. have cut their personal valuations. Others have had to raise fresh money at steep discounts in prior financing rounds.

Many fund managers agree with Mr. Fish. Those who bought stock in blockbuster IPOs in 2020 and 2021, including trading platform Robinhood Markets Inc., electric-vehicle maker Rivian Automotive Inc. and restaurant-software provider Toast Inc., are grieving big losses.

Bankers say that even though the IPO market is not yet healthy, there is a strong desire among many companies to go public. Some need cash. Others are running against a ticking clock for restricted stock units issued through vesting plans to employees. And some are eyeing acquisitions but need stock or money to complete the offers.

“I don’t think a lot of companies that are private now expect to be private by now,” said Barrett Daniels, co-leader of US IPOs at accounting firm Deloitte LLP.

He said companies that need funding, especially founder-led firms, may struggle with lower valuations their companies can now order. “It’s a really, really hard pill to swallow. Going backwards is hard to calculate,” he said.

There are a handful of companies slated to go public in 2022, people familiar with the matter said, including Intel Corp.’s self-driving car unit Mobileye, Instacart, and American International Group spinoff Corebridge Financial.

Other offerings, including the arm of SoftBank Group Corp., a chip-design specialist, following its failed sale to Nvidia Corp., are expected within the first few months of 2023, people familiar with the matter say.

There are many reasons for the IPO drought. Late last year, fears of inflation and subsequent Federal Reserve rates scared investors who had put money into companies that promised big growth but had little or no current profits. High-growth companies were sold off and inflation fears intensified, with many analysts warning of an impending recession, which eroded even profitable stocks. The economy contracted at an annual rate for two consecutive quarters, a common definition of recession, and volatility climbed.

Fund managers try to hedge against large losses, which means they should avoid taking on additional risk as in newly public companies.

Meanwhile, IPO advisors and investors agree that the IPO playbook is changing: They say that the first companies to go public after the market calms down should be profitable, large enough, and “own” names—companies that are well-known and led by them. in specific industries.

Many private companies are taking note. Thanks to cutting costs, Instacart, for example, was profitable in the second quarter of this year under generally accepted accounting principles, according to a person familiar with the matter. Revenue for Instacart climbed 39% from the year-ago period to $621 million during the three months ended June, investors told The Wall Street Journal, the highest quarterly revenue in Instacart’s history.

While some companies, including Klarna, were forced to face a sharp valuation cut as they needed to raise more money, many others are yet to be hurt for cash, as they did not hit the market in 2021. Had picked up a lot before. Last year, US venture-backed companies raised nearly $330 billion, nearly double the previous record in 2020, according to research firm PitchBook.

While the stock market is bouncing back and some secondary stock offerings have done well, bankers fear what a new issue could do to the underperforming IPO market.

In May, Bausch + Lomb Corp went public when virtually no one else was doing it, and investors were largely apathetic. I-Care Company kept its stock price at $18 per share, which was well below its expectations. People familiar with the matter said it had a valuation of about $6.3 billion, less than half of what the company expected to reach a few months ago. A company spokesperson declined to comment. Now the stock is trading at around $15.50 per share.

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