Don't expect an IPO market revival in these conditions even as J&J's Kenvue breaks drought

Published Thu, May 4 20237:21 AM EDTUpdated Thu, May 4 20237:33 AM EDT

The Kenvue initial public offering, which will begin trading Thursday on the NYSE under the symbol KVUE, is the consumer health-care spinoff from Johnson & Johnson . On paper, it is an IPO dream: a company with a well-known and well-analyzed revenue stream, a strong dividend, and a list of products known to everyone in America: Band-Aid, Aveeno, Johnson's baby shampoo, Tylenol, Listerine and Neutrogena. But the IPO business remains in disarray. First, the good news. Kenvue's IPO is priced at $22 , the upper end of the price range of $20-$23. It will sell 172.8 million shares. That is a $3.8 billion IPO, by far the biggest IPO of the year, and the largest since Rivian in November 2021, which raised $11.9 billion. They will pay a healthy dividend of 20 cents a share, which annualizes to a dividend yield of 3.6%, according to Renaissance Capital. Now the bad news. That $3.8 billion is more than was raised by all the IPOs so far in 2023. This is the second year in a row for what I am calling the Great IPO Drought: IPOs: The great drought Raised in 2023 YTD: $2.4 b. 2022: $7.7 b. 10-yr. avg: $55 b. Source: Renaissance Capital What's going on? The health of the IPO market is dependent on many factors, but principally it boils down to: 1) the strength of the overall stock market (trending up is best), and 2) interest rates (lower is better). Both have worked against the IPO business, starting with last year's 20% decline in the S & P 500, and continuing with the Federal Reserve's rate hikes. Because many IPOs are built on growth stocks (technology and biotechnology), and many are unprofitable when they go public, higher borrowing costs have been particularly devastating. The Renaissance Capital IPO ETF, a basket of 60 or so of the largest most recent ETFs, is less than half the price it was trading at going into 2022. But there has been an equally devastating effect on the IPO pipeline: Companies that were eager to go public have been frozen out of the market. The long list of IPO hopefuls There's a long list of companies that have been waiting to go public, or have been thought to be strong candidates to go public. In some cases, they have been waiting for more than a year. The list includes: Reddit Stripe Impossible Foods Fanatics StockX Flipkart Shien Chime ServiceTitan Databricks StubHub Saks Fifth Avenue E-commerce Klarna Many IPOs have been waiting to go public for a very long time. Instacart, for example, filed confidentially for an IPO in May 2022 but has done nothing. Reddit filed confidentially in December 2021. Others like Klarna are not reported to have filed confidentially but also have expressed interest in going public for a year. Why is this a problem? Many of these companies are now reaching middle-age without going public. That means investors have been denied the ability to participate in early-stage growth, which is typically the strongest period for returns. The IPO investor wish list: stable markets, Fed done hiking, and lower IPO prices "The most important factor for the IPO market is you need the market to hold up well," Santosh Rao, head of Research at Manhattan Venture Partners, told me. Another essential ingredient for a healthy IPO market: stable interest rates. "Any sign that the Fed is done raising rates would be a positive," Rao told me. The third element on the IPO investor wish list: lower prices. Those considering coming this year are under pressure to keep initial prices lower so investors can reap some upside, which they were denied in the past several years. "In a normal year you might see an average first-day pop of about +13-15%, and an average aftermarket return [after the first day of trading] of +4% at year-end," Matthew Kennedy from Renaissance Capital told me. But the IPO market hasn't seen a "normal" year in a while. High initial IPO prices have proven to be devastating to IPO investors. High prices were terrific for the companies, and initially terrific for the small group of investors that were allotted initial shares from the IPO and were able to quickly turn around and sell them on opening day. But from there, prices went south. IPO after-market returns (the returns after the first day of trading) were negative even prior to 2022, but got even worse when the market headed south and rates went up in 2022: The IPO market: it's about the first day trade (IPOs $50m+, 2019-thru 5/2/23) Avg First-day Return: up 25.2% Avg Return after Day 1: down 35.5% Avg Total Return: down 21.6% Source: Renaissance Capital The ARM announcement offers some hope Investors have been cheered by the announcement that SoftBank-owned Arm had submitted a confidential IPO filing in the U.S. last week. What's not clear is the valuation of the company, which may be anywhere from $30 billion to $70 billion. It's also not clear when it could begin trading. Assuming the confidential filing had just been made, it's likely it will take a couple months to get approval, get through a road show, and go public. That means July at the earliest. Then again, if conditions are not right, Arm could end up holding back, like so many other companies. Still, it's a start. "We want the door to crack open, and this is how it is done," Rao told me. "There are one or two guys who come out with a good story, and others pay attention."