IPO market hopes to revive in 2023

The IPO market has practically disintegrated. It’s worse than Thanos’ snap in Infinity War. Couple this with fears of a recession, compounded by high inflation, and it has nearly wiped billions in market value off stock markets around the world.

So it’s not too harsh to say that high inflation and prevailing geopolitical instability have caused global IPO volumes to fall by roughly 50% as companies struggle to deal with growing market uncertainties. The upcoming 2022 IPOs have been delayed until further notice.

The IPO market faced its worst October 2022, in more than a decade. (A person studying the performance of an IPO on a tablet; Image Credit – Freepik)

How has 2022 affected the IPO market?

According to some economists, this is the most confusing time in US economic history. While hiring remains strong, with the US adding 261,000 jobs in October, high inflation has caused the company’s revenue to plummet to dangerous depths.

The IPO market has been perhaps the hardest hit of all, with organizations scrambling to reassess valuations and further delaying scheduled IPOs. Instacart’s valuations have been adjusted three times this year, in preparation for Instacart’s IPO. The third quarter of 2022 saw the lowest SPAC IPO proceeds since the third quarter of 2016, and this comes after the country successfully managed to survive a global pandemic.

In the first quarter of 2022, there were just 77 initial public offerings raising $12.2 billion, compared to the first quarter of 2021, when 395 offerings raised $140 billion.

Major economies and financial markets have been feeling the heat as rising global volatility and inflation have resulted in falling global stock prices. The combined assault of these variables has made it difficult for risk assets to advance in this economy. According to data from the research firm IPO Capital of the Renaissancethis was the slowest October for the IPO market since 2011.

Companies that went public in 2021 have suffered the worst, with most trading for less than half the price of their initial public offering. Uncertainty surrounding Fed policy has forced companies to downsize and freeze IPO plans. Tech layoffs have dominated much of 2022, as companies restructure and regroup to survive what appears to be 2023 inflation, while threats of a recession loom large.

In the United States, as companies reassess their growth strategy and earnings forecasts, most upcoming initial public offerings have been put on hold until the market reopens next year.

inflation 2023
IPOs in the past year have underperformed, raising investor concerns. (A stockbroker studies the stock market in real time; Image Credit – Freepick)

Inflation 2023 and IPO

SP Global reported that IPOs totaled $45.6 billion in the third quarter of 2022, down from $118.24 billion in the same quarter of 2021.

While private companies have a little more leeway in how they operate, public companies must comply with the requirements and systems set forth by the Securities and Exchange Commission (SEC) and report on their financial performance regularly.

Average fees for writing an IPO, where a large financial institution, typically a bank, buys shares of the company and sells it to the public, can range from 3.5% to 7% of total IPO proceeds. The fees often run into the millions and if the public offering does not generate the expected profits, it can also result in large losses for the company.

Wary of the shaky market and additional fees, most companies have delayed blockbuster IPO calls to weigh their options to 2023. Although public offering dates have been pushed back, economists are adamant that activity is solid at the bottom. Most companies are taking the opportunity to monitor the market and prepare to adjust valuations if necessary.

However, investors are cautioning against expecting a repeat of the exciting IPO debuts of 2021. It’s no secret that Wall Street is risk averse and investors have already moved into lower-risk assets this season.

The threats of a possible recession have not helped matters and have made companies more determined to wait out the market downturn than to risk being plagued by a shaky economy. Inflation in 2023 could also put a damper on the plans, so even tech companies that need capital are being more cautious.

Most tech stocks have taken a beating of more than 50% this year, and the Fed’s rate hike has hit credit markets hard. Analysts believe things will pick up once the markets open up and inflation appears to be under control.

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