The IPO market has all but disintegrated. It is worse than Thanos’ snap in Infinity War. Add to it fears of a recession, compounded by high inflation, it has all but wiped off billions in market value from stock exchanges around the world.
So, it is not too harsh to say that high inflation and prevalent geopolitical instability have caused global IPO volumes to fall by roughly 50%, as companies scramble to face mounting market uncertainties. The upcoming IPOs of 2022 have been delayed until further notice.
How has 2022 affected the IPO market?
According to some economists, this is the most confusing moment in US economic history. While hiring remains strong with the US adding 261,000 jobs in October, high inflation has caused company revenues to plunge to dangerous depths.
The IPO market has, perhaps, been the worst hit of all, with organizations scrambling to reassess valuations and pushing scheduled IPOs further back. Instacart valuations have been adjusted thrice this year, in preparation for the Instacart IPO. Q3 2022 saw the lowest SPAC IPO proceeds since Q3 2016, and this comes after the country managed to successfully survive a global pandemic.
In the first quarter of 2022, there were only 77 IPOs that raised $12.2 billion, compared to 2021’s first quarter, when 395 offerings raised $140 billion.
Major economies and financial markets have felt the heat as increasing global volatility and inflation has resulted in falling global equity prices. The combined assault of these variables have made it difficult for risky assets to make headway in this economy. According to data from IPO research firm Renaissance Capital, this was the slowest October for the IPO market since 2011.
Companies that went public in 2021 have suffered the worst with most trading for less than half their IPO price. The uncertainty around Fed policy has forced companies to downsize and put IPO plans on ice. Tech layoffs have dominated much of 2022, as companies restructure and regroup to survive what appear to be inflation 2023, while threats of a recession loom large.
In America, as companies reevaluate their growth strategy and profit forecasts, most of the upcoming IPOs have been put on hold until the market reopens next year.
Inflation 2023 and IPOs
SP Global reported that IPOs totaled $45.6 billion in the third quarter of 2022, down from $118.24 billion in the same quarter of 2021.
While private companies get a little more wiggle room in how they operate, public companies must adhere to set requirements and systems put in place by the Securities Exchange Commission (SEC) and report on their financial performance regularly.
The average fees for underwriting an IPO — where a big financial institution, usually a bank, buys shares from the company and sells it to the public — can range anywhere between 3.5% to 7% of total IPO proceeds. The fees often run into millions and if the public offering fails to bring in the expected profits, it can also result in huge losses for the company.
Wary of the unstable market and additional fees, most companies have delayed so-called blockbuster IPOs to evaluate their options for 2023. Although public offering dates have been pushed back, economists are convinced that activity is strong in the background. Most companies are taking the opportunity to monitor the market and preparing to adjust valuations, if needed.
However, investors caution against expecting a repeat of the thrilling 2021 IPOs debuts. It is no secret that Wall Street is risk-averse and investors have already moved to lesser riskier assets this season.
Threats of a possible recession have not helped matters and have made companies more determined to wait out the market downturn than risk getting badgered in an unstable economy. Inflation 2023 might also put a dampener on plans, so even tech companies in need of capital are being extra cautious.
Most tech stocks have taken a beating of over 50% this year, and the Fed’s rate hike has severely hindered credit markets. Analysts believe that things will pick up once the markets open up and inflation seems to be under control.
