Last year saw a record number of initial public offerings (IPOs), with 397 IPOs in the US grossing about $142 billion. In stark contrast, only 17 IPOs have debuted so far in 2022. Renaissance Capital LLC Research director Nick Einhorn believes several market dynamics are contributing to the slowdown.
“Last year was an extraordinary year for IPOs”, Einhorn he told Yahoo Finance Live. “But from October-November, we really saw a pretty steep drop in growth-oriented stocks, which obviously tend to be a lot of IPOs, and especially high-growth, big-loss companies like a lot of the big names in software — and other tech names that have fueled the IPO boom in 2021. So really, we’re seeing a reversal this year.”
Einhorn joined Yahoo Finance Live to discuss the current performance of the IPO market. Renaissance Capital LLC is a Connecticut-based financial services company that specializes in IPO investment research and management. With more than $800 million in assets under management, Renaissance Capital also manages the Renaissance IPO ETF (initial public offering) for US-listed IPOs, as well as the Renaissance International IPO ETF (IPOS) for internationally listed IPOs.
Einhorn added that the IPO space may have been ripe for a recovery towards the end of the first quarter of the calendar year. However, just as markets finished digesting the transition from growth to value-oriented stocks in light of record inflation and Federal Reserve rate hikes, Russia launched its invasion of Ukraine.
“Things started very slowly as people dealt with those consequences. [of the move away from growth stocks],” he said. “And then I think we may have been ready to see a recovery starting in March. But then, obviously, the news came out of Ukraine and that also closed everything down.”
Indeed, the war between Russia and Ukraine has had significant implications for companies’ decisions to go public. For example, the best Volkswagens (VWAGY) shareholder Porsche SE said on Tuesday that the calendar of your plans Listing of luxury sports car maker Porsche AG in the fourth quarter of 2022 could be affected if the dispute drags on.
‘We need the markets to stabilize’
For the IPO space to grow again, Einhorn believes a higher level of stability within the broader market must be achieved. He pointed to the recent performance of the Renaissance IPO Index (IPOUSA.FGI), noting that the average 2021 IPO is down more than 20% from its issue price.
“So we need that number to stabilize a little bit, hopefully improve a little bit as well. And then we also need to see a little more valuation consensus between issuers and investors,” he said. “I think part of the reason we had so many IPOs last year was because valuations were very high in many places. And so, companies wanted to take advantage of that.”
Einhorn said the market is experiencing a state of subdued valuations compared to 2021, putting pressure particularly on high-growth tech companies looking to go public. Just last week, Instacart chopped up its internal valuation by almost 40% to about $24 billion in an effort to “help the company attract talent and adapt to market conditions,” according to Bloomberg.
“And that’s kind of a sign of the kind of correction that we’re going to need to see before IPO activity picks up,” Einhorn said.
Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter @thomashumTV