After a torrid first half, investors have IPO fatigue

Published Wed, Aug 11 20217:14 AM EDTUpdated Wed, Aug 11 20217:59 AM EDT

IPO fatigue? After a torrid start to the year, the IPO market has stalled. It all started so well. After being overwhelmed with SPACs, initial public offerings took off late in the first quarter and issuance remained strong into the second quarter. So far this year, 275 IPOs have raised over $96 billion, close to the record year of 2000. But what started as a big outperformance year for IPOs has fizzled, as investors have been pushing back against IPO prices that were set in the first half of the year. IPOs cut prices First, several high-profile IPOs were forced to dramatically lower the terms of their IPOs in recent weeks. Take grill-maker Weber , which went public at the NYSE last week. The company was originally seeking to raise 46.9 million shares at $15-$17, but ended up floating only 17.9 million shares at $14, a 66% haircut. Then there's fruit distributor Dole , which was seeking to go public at $20-$23, but priced at $16, though it did raise the shares offered. Candel Therapeutics also lowered its deal size by 15%. IPOs postponed Some didn't bother to lower their prices. They just canceled their IPOs. Seven IPOs have been postponed in the past two weeks: battery-maker Clarios, ad-tech Teads, lender Preston Hollow, biopharmaceutical royalty company Healthcare Royalty, clinical trial services provider WCG Clinical, wellness company The Better Being and law enforcement supplier Cadre Holdings. While companies do not typically cite a reason, most IPOs are postponed due to "market conditions," which usually means the stock market is in turmoil and investors are in a sour mood. That's not the problem here. Markets are at new highs. The problem, IPO Scoop's John Fitzgibbon said, are that IPO prices have been too high. "Most of these IPOs go to institutional buyers," he explained. "In many cases, the institutional buyers do not want to pay the prices the sellers wanted," so they are being forced to take a haircut, or walk away. Why is the market at new highs and my IPOs are not? While the S & P 500 is at a new high, IPOs are not. The Renaissance Capital IPO ETF is a basket of the 60 largest, most recent IPOs. It is flat for the year, while the S & P 500 is up 18%. The largest holdings in the fund peaked in the fourth quarter of 2020 or the first quarter of this year and are significantly off their 52 week highs: Recent IPOs (% from 52-week highs) Palantir 49% Unity Software 38% Coinbase 38% Snowflake 35% Peloton 32% What happened? First, many IPOs are technology and growth oriented. When interest rates rose in February, many got clobbered because higher interest rates reduce the value of a future stream of earnings that these companies are expected to throw off. Even though rates moved back down, many of these companies did not go back to their old highs. That caused a pushback against not just the prices, but the valuations of these companies. That pushback has continued into the second half. "The interest isn't there anymore," Fitzgibbon said. "It's all in the pricing. They have to get the right price, and they haven't been getting it. The tape tells the story." While the average IPO is up 10.2% this year, all of the gains have come on the first day of trading. The after-market return — the return after the first day — is a negative 8.3%, according to Renaissance Capital. Only 59% are trading above their offering price. That, Renaissance Capital CEO Bill Smith pointed out, is not the kind of returns that is getting investors excited. "Good luck getting investors to delay vacation plans to play those odds," Smith said in an email. 2021 second half prospects August is traditionally a slower month for IPOs, but the subpar after-market returns are a warning sign for IPOs that are attempting to float in the second half of the year. "That usually leads to pricing pressure and a tougher market," said Matt Kennedy, senior IPO market strategist at Renaissance Capital. Among Renaissance's watchlist of companies anticipated to go public in the fall are: Rivian (electric vehicle developer) GlobalFoundries (semiconductor designer and manufacturer) Instacart (grocery delivery platform, with a $39 billion valuation) Authentic Brands (parent of Forever 21 and Nautica) NerdWallet (personal finance app) Turo (rental car platform) Also anticipated are premium grocer The Fresh Market, online clothing rental firm Rent the Runway and hot dog chain Portillo's Restaurant Group. Online payments firm Stripe is also a possible IPO candidate. Whether these firms make it over the finish line depends, as always, on "market conditions" and whether or not they are willing to accept the prices that institutional buyers are willing to pay. Given the poor returns, Fitzgibbons expects pricing negotiations to be more intense than the first half of the year. "So far, it's been a lot of wings flapping, and not much flying for investors," Fitzgibbon said.

Chris Scherzinger, CEO, Weber, at the NYSE, August 5, 2021.

Source: NYSE

IPO fatigue? After a torrid start to the year, the IPO market has stalled.