You think the stock market had a bad quarter? The IPO market was a catastrophe, and it’s not looking much better for the third quarter. Almost no one wanted to go public in the second quarter, and with good reason: record inflation and heightened recession fears soured investor appetite for established stocks, let alone IPOs. The worst quarter in years There were only 21 IPOs in the second quarter, and they raised just $2.1 billion in new capital. How bad is that? It was the second slowest second quarter since 2009, according to Renaissance Capital. By contrast, in the second quarter of 2021, 118 companies raised $40.7 billion. “This is a dry spell that we believe is comparable to the aftermath of the Great Recession and the dot-com bubble bursting,” Matthew Kennedy, Senior IPO Market Strategist for Renaissance Capital, told me. The usual cutoff for a “significant” IPO is a raise of $100 million or more. Just six IPOs raised more than $100 million in the second quarter just ended, led by eyecare spin-off Bausch + Lomb, the largest IPO by far, which raised $630 million. Of the few that did make it public, less than 40% finished above their issue price, though a handful of volatile small deals drove the average return up to 108%. The Renaissance Capital IPO Index had its worst quarter since its 2009 inception, down 32% compared to the S & P 500’s 20% loss. Third quarter preview: will the IPO window open? Don’t bet on it, not with the markets in this condition. The market volatility, along with a reset of valuations, is making it very difficult for companies to go public. “Companies are in a holding pattern, further rationalizing their business models,” Santosh Rao, who evaluates IPOs at Manhattan Ventures, told me. “Preserving cash is paramount.” The CBOE Volatility Index (VIX), a rough proxy for market volatility, is being closely watched by IPO observers. “The VIX above 20 historically has not been a good setup for IPOs,” Rao told me. “Price discovery becomes very difficult.” Kennedy at Renaissance Capital agrees that stability and lower volatility are key to getting the IPO market going again. “Anything above 25 in the VIX is a danger zone,” Kennedy told me. Another prerequisite for an IPO reopening: positive returns. IPOs need to trade up consistently before the floodgates open. The Renaissance Capital IPO ETF (IPO), a basket of the roughly 60 largest IPOs in the last two years, is a good proxy. Only 11% of last year’s IPOs are trading above their issue price. In a more typical market, 60% are above their initial price. There’s plenty of well-known names sitting on the sidelines looking to go public The IPO prospects for the second half of the year are led by Intel’s self-driving vehicle technology business, Mobileye, which has a potential valuation of $50 billion, according to Renaissance. IPO candidates for the second half of 2022 are dominated by these names: Mobileye (self-driving vehicle technology) Arm (chip designer) Instacart (grocery delivery platform) Discord (gaming-focused voice chat service) Reddit (social media platform) Travelport (distribution platform for the travel industry) Several of those (Discord, Reddit) have valuations north of $10 billion, but those plans now hinge on whether they can demonstrate a clear path to profitability, Kennedy said. Kennedy said once-hot areas like fintech, crypto, electric vehicles and on-demand delivery are now unlikely to see much activity. Instead, he expects more IPOs within food, semiconductors and cybersecurity. If the market gets out of its funk, one other group is likely to see an IPO surge: oil and gas. Several oil and gas companies appear likely to IPO, including E & P Ascent Resources, frac sand provider Atlas Sand, and natural gas driller BKV, Kennedy told me.
