No smart investment banker would counsel a CFO to price an initial public offering (IPO) when stock markets turn volatile. That’s why “upcoming IPOs” calendars are bare, and the one company that did list in March (as of Friday) saw its shares dive 65% on the open market.
The go-to for measuring equity market volatility is the CBOE Volatility Index (VIX), a real-time metric generated from S&P 500 options prices. The VIX, also called the stock market’s “fear gauge,” aims to forecast 30-day forward volatility in the S&P 500.
CFOs, especially those trying to get new investors to bite, don’t like volatility because it means risks and surprises. The rule of thumb is the VIX needs to be at least under 20 (thought ideally closer to the mid-teens) for an IPO to safely price.
As the chart shows, the number of IPO pricings is negatively correlated with the VIX. When the VIX drops, companies jockey to list while the “window” is open, as occurred in mid-June 2021. Conversely, when the VIX rises, especially to 25 and above, the window typically shuts.
(Of course, the “rule” has exceptions: thanks to a large backlog of companies and historic volatility in 2020, 74 IPOs priced in the last three months despite a median VIX level of 28.)
This year, volatility has nearly closed the lid on new public listings. The VIX has averaged about 26 year to date. However, since February 23 (the day before Russia invaded Ukraine), the VIX has hovered chiefly above 30 and hit 36.5 on March 7. No surprise, then, that only 17 U.S. IPOs have priced in 2022, 75% off last year’s pace.
Relatively high volatility also squelches the performance of the recently IPO’d, further dimming private companies’ hopes: the Renaissance IPO Index, a portfolio of the largest, most liquid, newly-listed U.S. IPOs, is down nearly 30% year to date.
According to conventional wisdom, volatility tends to rise during bearish markets or big downward moves in stocks, so IPOs currently on deck have to be patient. The S&P 500 has lost more than 7% year to date, and there’s lots of uncertainty moving forward: geopolitical risks, continued supply chain bottlenecks, rising inflation, and constant attention to how high the Federal Reserve will hike interest rates.
Analysts doubt the VIX will spike as it did two years ago — it started 2020 near 12 and surged to 82 on March 16, 2020, the day New York City closed its public schools. In comparison, this year the markets have stayed relatively cool, said Berlinda Liu, a global research and design director at S&P Dow Jones Indices.
“Historical data show that the equity markets may be more robust than we expect and tend to bounce back quickly after elevated volatility,” Liu said. However, she added, “the swings in U.S. equities could continue and test investors’ sentiment in the coming weeks.”
This week, the VIX dropped and was trading below 25 at midday on Friday. A positive sign? Michael Kramer of Mott Capital Management thinks markets aren’t ready to take down the “IPOs Unwelcome” sign. Options traders seem to be hedging the risk of stocks moving another leg lower, he wrote on Tuesday. “There has been a lot of betting suggesting that the VIX rockets higher in the weeks ahead.”