87 Percent Of Last Year's IPOs Now Below Listing Price, Suppressing New Demand

Of the 87% of IPOs that went public in 2021 and are trading below their initial listing price, the average drop below offering is 49%. 

This is causing venture investors and others to hold off on investing in new IPOs until at least some of the 2021 class begins to show signs of upward movement. Investors expect IPOs to perform at or above expectations. That's why they were taken public. JL 

Corrie Driebusch reports in the Wall Street Journal:

Recently public companies are among the worst performers in this year’s stock-market rout, contributing to a deep freeze in the IPO market that shows few signs of thawing. 87% of companies that went public in the U.S. last year are trading below their offering prices, down more than 49% on average as of Friday’s close. The IPO market is having its slowest year in more than a decade, with just $7.2 billion raised in traditional new stock offerings in the U.S. “Investors expect IPOs to perform well. The most recent class has severely underperformed, and that’s one of the reasons we’re seeing so little activity.”

Recently public companies are among the worst performers in this year’s stock-market rout, contributing to a deep freeze in the IPO market that shows few signs of thawing.

Roughly 87% of companies that went public in the U.S. last year are trading below their offering prices, down more than 49% on average as of Friday’s close, according to Dealogic. By rough comparison, the S&P 500 is down 23% this year, while the tech-heavy Nasdaq Composite has fallen 31%.

Shares of insurer Oscar Health Inc. OSCR 2.51%▲ and clothing-rental company Rent the Runway Inc. RENT 0.85%▲ are down more than 85% from their respective initial-public-offering prices. Payments-processing company Marqeta Inc. MQ 0.75%▲ and stock-trading platform Robinhood Markets Inc. HOOD 4.00%▲ are down more than 70%, while restaurant-software provider Toast Inc. TOST 3.34%▲ and online-education provider Coursera Inc. COUR 2.71%▲ have fallen by more than half.

 

That is scaring off fund managers, who tend to shy away from new issues if recent ones they have bought are performing badly. They are unlikely to return to the market before the shares stage a significant comeback, some bankers say, which could keep IPO activity in the doldrums for the balance of the year and beyond.

“Investors expect IPOs to perform well, and usually that works,” said Mark Schwartz, head of IPO and SPAC Capital Markets Advisory at Ernst & Young. “The most recent class has severely underperformed, and that’s one of the reasons we’re seeing so little activity.”

The IPO market is having its slowest year in more than a decade, with just $7.2 billion raised in traditional new stock offerings in the U.S., as a volatile stock market, escalating fears of a recession and other factors take their toll.

It is a far cry from last year, when traditional offerings, which don’t include special-purpose acquisition companies, raised $154 billion in the busiest year for IPOs on record. Until the final months of 2021, the majority of IPOs that year were trading above their offer prices, but by year-end, two-thirds traded below.

For the batch of traditional IPOs in the U.S. this year, the performance is also disappointing, with roughly 85% trading below offer price, according to Dealogic. Corebridge Financial Inc. CRBG 0.75%▲ recently staged the biggest new listing of the year, but the life-insurance and asset-management unit of American International Group Inc. did little to spark a rebound in the beleaguered IPO market; at $21 a share, the offering was priced at the low end of expectations and as of Friday traded below that.

Also chastened by the dismal market conditions are companies waiting in the wings to go public. For them, falling stock prices are contributing to significantly lower valuations, which damp the allure of a public debut.

That has prompted some companies that had planned to go public this year to hold off, hoping conditions will improve in 2023, according to IPO advisers and lawyers. Others have scrapped listing plans altogether. After multiple delays, yogurt maker Chobani Inc. earlier this month said it wouldn’t pursue an IPO at this time.

Some companies, such as Klarna Bank AB, are being forced to raise money privately, at significantly lower valuations. Others are choosing to be acquired instead, such as collaboration-software company Figma, which sealed a $20 billion deal with Adobe Inc.

The slowdown is hurting banks. Goldman Sachs Group Inc., GS -1.10%▼ Morgan Stanley MS -0.35%▼ and JPMorgan Chase JPM -0.88%▼ & Co., three of the leading IPO underwriters, all reported sharply lower investment-banking revenues in the second quarter.

 

IPO advisers say there are still a substantial number of companies considering late-2022 stock-market debuts, but they are playing it week-by-week. The biggest desire for these companies is stability—both in the financial markets and in the broader economy.

Companies currently considering public debuts before the end of the year include grocery-delivery company Instacart Inc. and Intel Corp.’s self-driving-car unit Mobileye. Digital-advertising company Aleph Group Inc. is planning an October offering, having previously eyed an early-2022 IPO, The Wall Street Journal reported.

Not all 2021 IPOs are faring so badly. Shares of drive-through coffee chain Dutch Bros Inc. BROS -0.47%▼ are up roughly 40% from its IPO price of $23 a share. Health-technology company Doximity Inc. DOCS -1.76%▼ is also bucking the trend, up around 17% from its IPO price of $26.

A complete reversal of the current trend isn’t necessary for the IPO market to regain its health, some advisers say.

“All these stocks do not need to start trading above IPO price for the market to reopen,” said Steve Maletzky, head of equity capital markets at William Blair. “It’s much more important for the next three to four IPOs to trade well than for all the 2021 IPOs to get back to IPO price.”