Green shoots for the IPO market, but investors ask where are unicorns such as Instacart, Klarna

Published Thu, Jun 22 20239:18 AM EDTUpdated Thu, Jun 22 202312:55 PM EDT

The two main issues for a revival in initial public offerings are 1) a strong market, and 2) stable interest rates. With the S & P 500 set to trade down for a fourth-straight day Thursday, investors are watching to see if the recent rally in the S & P 500 is sustainable. Meanwhile, short-term Treasury yields have been trading at the high end of their recent range and are being carefully watched. Three companies announced they would go public at the New York Stock Exchange next week, all in the significant $300 million range: Fidelis Insurance , a global provider of specialty insurance and property reinsurance, plans to offer 17 million shares at $16 to $19. At the midpoint, this would raise $298 million, with a fully diluted market value of $2.1 billion, according to Renaissance Capital. Kodiak Gas Services , which provides natural gas compression services in the U.S., plans to offer 16 million shares at a price range of $19 to $22. At the midpoint of the proposed range, that would raise $328 million with a market value of $1.5 billion. Savers Value Village , the largest for-profit thrift store operator in the U.S. and Canada, plans to offer 18.8 million shares at $15 to $17. At the midpoint, this would raise $301 million, with a fully diluted market value of $2.8 billion. While all three are in niche spaces — reinsurance, natural gas and retail — the fact that all are in the $300 million range, and all are coming in the same week, is significant. It means nearly $1 billion will be raised by IPOs next week. That has not happened in a long time, Matt Kennedy from Renaissance Capital told me. "In the last year and a half, there's only one other week where more than $100 million was raised by three companies," he told me. "The IPO market is definitely opening up," he said. Goldman Sachs' David Kostin has also noted an improved IPO market. In a note to clients on June 13, just before the Cava IPO , Kostin noted that an IPO Barometer Goldman uses to gauge IPO sentiment had been improving dramatically, spurred by a stabilization in equity prices, an improvement in CEO confidence, a peak in front-end rates and the expected end of the Fed rate hiking cycle. Where are the unicorns? The big issue now is, what about the larger players that have been potential IPO candidates for a long time, such as Fogo de Chao, Panera Bread, Reddit, Instacart, Stripe, Impossible Foods, Fanatics, StubHub and Klarna? Chip designer Arm is already in talks with clients about being early-stage investors in its IPO, but investors say many so-called unicorns are still unsure whether now is the right time to jump in. "The volatility has come out of the market, so those companies who have been in our pipeline, some of which have been in our pipeline for more than 18 months, if not longer, are starting to have conversations with us," NYSE President Lynn Martin said in an interview on CNBC last week. That's a hopeful sign, as was the Cava IPO. "What Cava showed to me is that there is risk capital out there, there are investors out there if the metrics are right," Santosh Rao, head of research at Manhattan Venture Partners told me. Still, those larger companies need strong signals the coast is clear. "There are still some dark clouds hovering," Rao told me. "We don't know if there is going to be a recession, how many more rate hikes there will be. They need a clearer sign." "I am expecting IPO activity/filings to pick up in 4Q," he told me. "Until then, I expect to see small, niche, nontech companies such as these four to float their IPOs, not unlike previous years when conditions were similar." Next-day IPO curse Fast-food restaurant chain Cava went public last week with a bang, pricing at $22, opening at $42 and closing at $43.51 on the first day. The good news: The strong initial pricing was a positive signal to other potential IPO candidates. The bad news: The stock dropped the day after the IPO to roughly $38 and has remained in that range. Call it the "first-day IPO curse," the tendency of IPOs to trade up on the first day, then lower the following day and often for months after. IPOs: first day curse (Since 2018) Average first day pop: + 25% Post-first day: - 26% Source: Renaissance Capital This happens because initial excitement over the IPO tends to drive prices higher on the first day, in a classic example of herd behavior. It's a well-studied phenomenon and the source of great frustration among retail investors, most of whom are buying on that first day. Still, with Cava trading well above its initial price of $22, those big institutional funds that got initial allocations are sitting on very large profits for their clients.