Four attention-grabbing initial public offerings in the last two months should have augured well for companies waiting to list since 2022, when listings activity hit the skids.
They pushed U.S. IPO proceeds to $7.8 billion in the third quarter, almost a four-fold increase from a year ago. But they left choppy water for companies that hoped to follow in their sizable wake.
All four of the stocks – Arm, Instacart, Klaviyo, and Birkenstock — had a first-day pop but now trade 4% (Birkenstock) to 26% (Maplebear, doing business as Instacart) below their first-day prices. The shares have also been highly volatile.
“Their lackluster aftermarket trading could pressure valuations of future pricing,” said Renaissance Capital’s third-quarter IPO market review.
Last quarter’s IPOs averaged a weak -32% return from offer, according to Renaissance Capital, manager of the Renaissance International IPO ETF. The firm said smaller listings dragged down the average.
A Parched Market
But there’s more weighing on the equities markets than two months ago or even the beginning of October.
With the 10-year and 2-year Treasuries yielding close to 5%, will an investor take the risk and jump into the IPO market?
“The company winds up stuck: does it take the haircut or eat the $2 million or $3 million it just spent trying to go public?”
In general, except for select companies, now is not the best time to go public, said Peter Janssen, partner in investment banking at Janssen Partners, who helps small-cap companies raise capital, both publicly and privately. Not many deals are getting done, and liquidity has dried up.
“The whole problem with going public is that you’re probably not going to get the best valuation,” Janssen said. “You’re probably going to trade down.”
According to Janssen, in a typical scenario, a banker promises a high valuation, and the potential issuer spends a couple of million dollars on preparing filings and getting its financials and controls ready. But three days before the IPO, the banker cuts the valuation in half.
“The banker comes back and says, ‘We went did our market research, and we got $100 million of orders, but it's at a $500 million valuation,’” said Janssen. “The company winds up stuck: does it take the haircut or eat the $2 million or $3 million it just spent trying to go public?” Janssen asked.
Currently, most private companies should stay private until the IPO window opens and raise money privately, “in a smart, structured way,” if they can afford to, said Janssen. That might mean swallowing a lower valuation.
There is also a way for companies to use a Form 10, a general form for the registration of securities, to set a price now — “peg” the issuer’s valuation — and go public six months from now. Janssen has used this structure with several clients.
A few companies can still go public in this market. But they have to have world-class management teams that know how to run a public company, said Janssen.
Particularly attractive, Janssen said, would be companies producing products for the betterment of humankind with the potential for multi-billion dollar valuations — and “a story that will resonate with the public.”
On a broader basis, the IPO market will come back, but the turnaround will most likely be correlated with lower interest rates, said Janssen. That probably means waiting for 2024.
That’s not stopping some companies from filing for an initial offering. Brightspring Health Services, a KKR-backed health-care services provider and Waystar Holding, a health-care payments services provider, are among the companies the market is watching to see if they postpone their deals or try to list this quarter.