A flurry of stock market listings on both sides of the Atlantic has proved to be a flop for investors, highlighting the challenges facing companies with plans for market debuts in today’s punishing environment.
Chip designer Arm, delivery company Instacart and software group Klaviyo all priced initial public offerings at or above their target ranges in US listings in September. Sandal maker Birkenstock raised more than $1.5bn in October.
The deals may have been a success for the companies’ previous owners, particularly as many businesses have struggled to list at all over the past two years.
However, all four are now trading below their initial prices, damaging hopes of bankers who were expecting it would herald a return to normal activity levels.
A flame-out in the UK equity markets has been even worse. London’s most prominent IPO of the year, the fintech CAB Payments, saw its shares collapse 72 per cent last week after it scrapped its revenue forecast just three months after listing.
It all raises the stakes for CVC, the private equity group considering Europe’s most hotly anticipated listing of the year. CVC, valued at €15bn in 2021, has been exploring a listing in Amsterdam and may make a decision as early as this week.
Global listing volumes cratered last year due to falling valuations and rising market volatility, and they have yet to fully recover. After the false dawn of recent weeks, some investors are bracing themselves for an early winter shutdown of the market.
“It’s been a little bit of an emotional rollercoaster,” said Richard Truesdell, global chair of capital markets at the law firm Davis Polk. “My optimism from a few weeks ago has now turned to thinking the IPO window won’t reopen until March 2024.”
Companies have raised $19bn in the US so far this year, according to Dealogic data, not including special purpose acquisition companies. That is more than double the amount raised by this point last year, but still down 85 per cent compared with the first 10 months of 2021.
Bankers and private equity executives looking to offload their stakes in portfolio companies on to public markets are finding that investors are simply less willing to take on equity market risk, given weakness and volatility in the shares already out there and the strong comparative allure of government bonds now yielding 5 per cent, even with maturities as short as two years.
In Europe, which has a weaker economic growth outlook than the US, many companies that floated have fallen below their offer price. German pharmaceutical glassware company Schott Pharma is a rare exception, but shares in Italian gaming company Lottomatica and German web hosting group Ionos have stumbled.
Several listings have been put off. French software company Planisware and German military contractor Renk halted their plans while companies that had hoped to list in the US in October, such as car-sharing group Turo, have also been delayed.
“Everyone is revisiting plans,” said Matthew Witheiler, an investor at the $1tn asset manager Wellington Management who specialises in late-stage private companies. “There were companies in my portfolio planning [to list] as early as December, with confidential filings, that are ready to go, and they are revising given everything that has gone on. Why rush out the door?”
The market is not completely closed. Oil and gas group Mach Natural Resources raised almost $200mn earlier this month. In mid-October, Hamilton Insurance Group filed to float in New York. Safety testing company UL Solutions is still aiming to list before the end of the year in what could raise as much as $1bn.
However, those companies are very different to the growth-focused tech companies that make up the bulk of candidates in the IPO pipeline.
“We’re going to be OK and see some deals by the end of the year, but overall activity won’t be incredibly robust,” said Patrick Murphy, head of NYSE market making and listing services at GTS, the trading firm.
Bankers are now hopeful that IPOs will re-emerge once markets are calmer.
“Naturally, there are a lot of really good companies that are just waiting on the sidelines for the current market volatility to settle down,” said Lyle Schwartz, Evercore’s head of equity capital markets for Europe, the Middle East and Africa. “Some issuers have decided to move their target IPO timing into 2024 when hopefully the macro, geopolitics and deal activity will improve.”
In the rocky market, the types of deals that have gone out have been structured differently than is typical. Rather than focusing on raising new funds, many of this year’s prominent IPOs have featured insiders offloading shares.
These deals have also been backstopped by anchor investors, who agree to publicly back the IPO in return for getting a guaranteed allocation of shares. Publishing the names of big-name investors may also persuade wavering asset managers to buy in.
However, that has not been able to overcome lesser investor appetite. The best-performing large IPO of this year — US restaurant chain Cava — was more than 20 times oversubscribed. In contrast, many recent share sales have been heavily concentrated.
Many investors are demanding a steeper discount to make up for the increased risk of investing in newly listed groups. In the case of Birkenstock, its offer price gave it a higher price-to-earnings ratio than larger and more diversified rivals such as Nike and Lululemon, which put off some investors.
“The momentum dies when deal performance dies and that’s what you’ve seen,” said David Erickson, a former equity capital markets banker and lecturer at the University of Pennsylvania. “Until the market improves, I think we’re going to be sitting here for a while.”