By Ciara Linnane
The U.S. initial-public-offering market is staring down another slow week, with just one small deal on tap, capping a period of little to no activity as investors eye volatile secondary markets amid high inflation, supply-chain snags and a raging war in Europe.
There were just seven IPOs in May that raised an aggregate $1.1 billion to mark the slowest month for new deals in more than five years, according to Bill Smith, co-founder and chief executive of Renaissance Capital, a provider of IPO-focused ETFs and institutional research.
The typical flurry of deals that tend to come after the Memorial Day weekend failed to materialize, with just Hong Kong–based online brokerage Zhong Yang Financial Group /zigman2/quotes/229903899/composite TOP -13.94% coming to market last week. That deal priced at the low end of its range to raise $25 million at a valuation of $175 million.
“The big macro overhang is rising interest rates, which are really poison for growth stocks,” Josef Schuster, founder of IPOX Schuster LLC and chief architect of the IPOX indexes, told MarketWatch.
“You can see today that the market tried to hang in, but then yields went up, and that’s the big overhang that needs to be resolved. That won’t happen until the Fed is done taking action.”
The IPO market is also being hurt by the poor returns stemming from last year’s bumper crop of deals, said Shuster. More than 1,000 new companies listed shares on U.S. exchanges in 2021 to raise $315 billion, according to data from Dealogic.
Many of those deals are now foundering, causing investors to lose money and shy away from new offerings.
The pre-IPO market, meanwhile, has swept up billions of dollars that’s now stuck as valuations are being questioned amid the wealth destruction in the technology sector. (The pre-IPO market allows employees and accredited investors to trade shares of privately held companies that are preparing to go public.)
“The pre-IPO market didn’t exist 10, or 20 or 30 years ago, but a lot of investors are now stuck in markets that can’t be valued because sponsors have not been updating,” said Schuster.
Hedge funds are also hitting a wall, he said. Tiger Global Management, for example, is reported to have lost more than 50% of its value in 2022 after betting big on tech names including Snowflake Inc. /zigman2/quotes/220991541/composite SNOW +6.99% , Sea Ltd. /zigman2/quotes/202797958/composite SE +2.11% and Carvana Co. /zigman2/quotes/206651606/composite CVNA +12.00% , as CNBC reported last week.
One positive sign is that those companies that have braved the market in 2022 are performing well, said Schuster. Examples include oilfield-services company ProFrac Holding Corp. /zigman2/quotes/205799676/composite PFHC +0.82% , which is up about 10% since it went public in early May, and Excelerate Energy Inc. /zigman2/quotes/234461550/composite EE -2.15% , which is up about 5% from its April debut.
“There’s a vintage of deals that are getting cheaper and doing well, and that may be a light at the end of the tunnel,” Schuster said. “Founders are being more selective, and investors are being more selective, so things are becoming more rational, which may mean a turnaround later this year.”
One IPO vehicle that is currently struggling is the special-purpose acquisition corporation, or SPAC, model that became highly popular during the pandemic. SPACs, also called blank-check companies, are shells that list on exchanges and then have up to two years to acquire a business or businesses, which then become public companies.
Last week, Forbes and SeatGeek were forced to abandon SPAC deals, joining a growing roster of companies that had to cancel plans.