A company is unlikely to sell new stock if the equities markets are not welcoming new issues with open arms, market volatility is high, a depressed stock price would make equity expensive, or a slew of other reasons. This year, multiple variables have put many initial public offerings (IPOs) and sales of common and preferred stock on hold. Capital raising in the equities markets is in the doldrums, though summer’s official start is still 18 days away.
Common stock issues (IPOs plus secondaries) totaled only $33.9 billion as of the end of May, off 80% from the same period in 2021, according to SIFMA. That’s almost the exact amount a single company (admittedly, a big one — Amazon) allocated to capital spending in 2020. Preferred stock sales this year are off 73%. (See chart, “Dry Months for U.S. Equity Issues.”)
While we eschew the term “on pace to…,” 2022 could be the sparsest year for equity capital raises (measured by dollars issued) since 2016, or, prior to that, 2011.
The IPO market is almost completely frozen. The Cboe Volatility Index was still unfavorably high in May (26.2 on average) and for the year stock indices stayed in the red. Companies that went through with IPOs tended to experience the “pop and drop” trading pattern, to borrow a term from Bill Smith, CEO of Renaissance Capital.
The Bausch & Lomb spinoff, for example, raised capital at $18 per share on May 6, closed first-day trading at $20 (hardly a “pop”), and on June 3 shares traded at $16.60. This for a company that among 2022 IPOs had arguably the most mature business and recognizable brand.
You can’t blame investors or CFOs for being cautious. Only 18% of the 549 CPAs surveyed by the AICPA a few weeks ago expressed optimism about the 12-month U.S. economic outlook. The number of finance executives who said their companies plan to expand over the next 12 months fell from 62% last quarter to 53%, said the AICPA on June 2. And revenue growth projections for the next 12 months fell to an average of 3.4%, down from 4.5% last quarter.
“Global dislocations, a volatile pricing and cost environment, and the continuing impact of workplace shifts such as the Great Resignation are putting a lot of pressure on businesses and their finance teams,” said Tom Hood, an executive vice president at the AICPA.
That may be an understatement. Bankers, hoping to reverse the sharp slowdown in revenue from their equities underwriting, have said the backlog of companies eager to raise capital is strong. But few finance executives would chance current market conditions without a clear sign that some of the systematic risk has subsided.