The IPO party fizzles out for tech start-ups

New York — The party is over for technology start-ups rushing to go public at ever-higher valuations, as volatile US stock markets have dampened investor appetite for high-growth stocks.

A 6% drop in the S&P 500 index and a 75% rise in Wall Street’s fear gauge, as the Cboe Volatility Index is known, since the beginning of the year have led many companies to push the pause button on listing plans.

Software start-ups WeTransfer and Justworks and bitcoin miner Rhodium Enterprise are among the half-dozen companies that cancelled initial public offerings (IPOs) in January, citing adverse market conditions. Other postponed listings were apparel chain operator Authentic Brands Group, insurance technology start-up TypTap, and real estate investment trust Four Springs Capital Trust.

“You’re going to continue to see probably fewer deals launched than you otherwise would have if the market hadn’t gotten a lot choppier here,” said Eddie Molloy, co-head of equity capital markets for the Americas at Morgan Stanley.

Most of the 396 companies that went public in 2021, excluding special purpose acquisition companies, are trading well below their flotation price as investors worry about frothy valuations. The stock prices are down 28% on average, according to Dealogic.

January’s sell-off of technology stocks, driven by the prospect that higher interest rates will make investors more risk-averse, further spooked investors. The tech-heavy Nasdaq ended January nearly 9% lower than it started the month.

IPOs raised about $6.9bn in January, down 83% from the same period in 2021, according to Dealogic.

Companies with plenty of growth but little or no profit to show were snubbed first by IPO investors.

“The recent and anticipated moves in interest rates are forcing investors to revalue cash flows, growth and risk, translating to a rotation away from the highest-growth, riskiest assets across sectors,” said Andrew Wetenhall, co-head of equity capital markets in the Americas at Morgan Stanley.

This raises questions about the timing of big technology offerings expected this year, including Intel’s autonomous vehicle unit, Mobileye, social media platform Reddit and delivery start-up Gopuff.

If market volatility continues, it may benefit direct listings at the expense of traditional IPOs, investment bankers say. In a direct listing a company goes public without selling shares though underwriters, and its stock market debut is less vulnerable to market jitters.

Unicorns

To be sure, IPO bankers and lawyers have said the pipeline for companies looking to go public in 2022 remains healthy. Several technology unicorns are still planning to go public in the second half of the year.

“Markets loathe uncertainty, so any alleviation of it should improve the market backdrop, especially for IPOs,” said Michael Ventura, MD at RBC Capital Markets.

Tech stocks and the broader market rebounded this week, recovering close to half of their losses in January and giving dealmakers hope the IPO environment will become favourable again soon.

Jimmy Baker, president of B Riley Securities, said the IPO market recovery may start with companies that generate strong cash flows going public, as investors with little risk tolerance for loss-making unicorns are attracted to offerings that promise to deliver yield.

“There's not a lot of receptivity to IPOs. [However], we expect in the near future, there will be receptivity to yield-oriented opportunities,” said Baker.

Reuters