Blockbuster listings for Instacart-owner Maplebear (CART) today and Arm Holdings (ARM) last week may suggest that the sluggish initial public offering (IPO) market may be turning. However, there may be reason to temper that optimism a little.
The global IPO market has struggled amid rising interest rates and market uncertainty, while proceeds and returns have substantially lagged their pre-pandemic averages, according to a Goldman Sachs report.
- Rising borrowing costs have quashed demand for U.S. IPOs, which haven't exceeded 25 for a single quarter over the past six.
- Companies that have gone public since the pandemic have broadly underperformed the broader market, lagging the Russell 3000 by 48 percentage points over a 12-month period.
- With interest rates expected to remain high for the foreseeable future, we could expect a sluggish IPO market in the months ahead.
Economic Conditions Weighed On Lackluster IPOs
The global IPO market has struggled since central banks around the world started raising interest rates last year in an effort to tame the highest inflation in decades. Higher borrowing costs and tighter financial conditions led to a slowdown in corporate lending and more cautious investors. The S&P 500 fell into a bear market last year, while IPOs slowed to a trickle after the record-breaking activity of the first two years of the pandemic.
The number of U.S. IPOs hasn't exceeded 25 for a single quarter over the past six, dating back to the start of last year. This contrasts with 84 IPOs in the fourth quarter of 2021, and a stunning 118 in the second quarter that year, according to KPMG. In the first half of this year, 63 companies went public, compared to 416 through all of 2021.
Companies that have gone public have raised just a fraction of the proceeds from two years ago. Proceeds for the latest quarter ended June totaled $6.6 billion, above a trough of $1.2 billion in the fourth quarter last year, but well below a peak of $40.7 billion in the second quarter of 2021.
Blockbuster Listings For Instacart and Arm, But Economic Challenges Remain
Shares of grocery-delivery firm Instacart jumped more than 40% at $42 per share in their Nasdaq debut, after the company set its IPO price at the top of its range at $30 per share. Last week, American depositary shares (ADSs) of Arm, a U.K.-based chip design company, had skyrocketed almost 25% and were worth nearly $63 by the end of trading after setting its IPO price at $51 per share. Arm's was the biggest U.S. IPO since 2021.
With interest rates projected to rise or remain high for the foreseeable future, there is no guarantee that the IPO market won't revert to its sluggish ways in the months ahead.
IPOs Buoyed By Large Investors, Should Retail Investors Avoid Them?
Not only have there been fewer IPOs, but companies that have gone public since the pandemic have largely underperformed the broader market. According to Goldman Sachs analysts, the median IPO in 2020-2021 lagged the Russell 3000—an index that comprises roughly 98% of the U.S. equity market—by 48 percentage points within 12 months after going public. Just 18% of IPOs have managed to outperform the broader market over this period.
It's important to note that it is extremely difficult for retail investors to score shares in IPOs. A majority of the shares tend to get allocated to institutional or high-net-worth investors. Retail investors are often only able to get their hands on shares after they begin trading on exchanges.
If there is a lot of hype surrounding the company, an IPO can quickly get oversubscribed as even the largest investors clamor to get a piece of the company.
For example, Japanese conglomerate SoftBank, which has privately owned Arm since 2016, still has a 90.6% ownership stake in the company, meaning less than 10% of shares were available through the IPO. Some of Arm's biggest clients include big tech companies like Apple (AAPL), Amazon (AMZN), and Nvidia (NVDA), which rely heavily on Arm's chip designs to manufacture millions of semiconductors each year, and had expressed interest in purchasing up to $735 million of the company's stock collectively.
Similarly, institutional investors such as Norges Bank, private equity companies including TCV and Sequoia Capital, and hedge funds such as D1 Capital Partners and Valiant Capital Management all sought to purchase up to $400 million worth of shares in Instacart.