IPO Market Has Grown Quiet Again. Here’s What is Behind the Shift in Sentiment

The period leading up to Thanksgiving, traditionally marked by a flurry of significant IPOs, is unusually quiet this year. Don Short of InvestX notes that whatever IPO activity is expected for the remainder of the year should be unfolding now. However, the current scenario is quite the opposite.

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According to Matt Kennedy from Renaissance Capital, the combination of a poor stock performance in October, sustained higher interest rates, underwhelming post-IPO performances from recent debuts, and the potential for significantly reduced valuations is causing many IPO candidates to reconsider or delay their plans. The steady increase in the 10-year Treasury yield is particularly dampening market enthusiasm.

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Several companies are postponing their IPOs. Waystar, originally considering a roadshow last week, is reportedly delaying until December or even 2024. Panera Bread, gearing up for a potential IPO next year, is laying off corporate staff.

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Even those still interested in going public may face substantial valuation cuts. Klarna, a buy now, pay later firm, denies immediate IPO plans after its last funding round marked a significant 85% decrease in valuation. Shein, the Chinese fast-fashion giant, is uncertain about the timing and valuation of its IPO, aiming for an $80 to $90 billion valuation despite a May funding round valuing it at $66 billion.

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This contrasts with typical years when major IPOs occurred in November and December. However, the IPO momentum that characterized 2021 and earlier years is notably absent in 2022 and continues to be so this year.

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The lackluster performance of recent IPOs, such as Instacart, has further contributed to the hesitancy in the market. Three of the largest IPOs of the year are trading below their offering prices, and Klaviyo, which went public in September, is 8% below its offering price.

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Despite the challenges, the market isn't entirely closed. Kennedy suggests the possibility of activity in December if the current market rally persists. Some small firms, like U.S. natural gas producer BKV and homebuilder Smith Douglas, are still in the IPO pipeline, updating their prospectuses.

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The focus on AI also plays a role, with older IPO candidates like Reddit or Stripe losing appeal over time. Don Short notes that the excitement in the market is currently centered around AI, and companies not associated with AI are facing challenges in securing funding.

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IPO candidates are left with three choices: go public with a likely substantial valuation cut, stay private with a potential reduction in valuation while relying on existing venture capital funding, or explore mergers or exit strategies. Greg Martin from Rainmaker Securities emphasizes the tough position many tech unicorns (with valuations above $1 billion) find themselves in, with some facing the possibility of M&A or closure due to a lack of demand and lower quality financials.