The IPO market is looking very shaky and facing challenges galore

Published Thu, Feb 1 202411:02 AM ESTUpdated Thu, Feb 1 202412:28 PM EST

The initial public offering market is looking very shaky and is confronted with a host of challenges that are holding it back. Amer Sports, the company that owns iconic sports brands such as Wilson tennis rackets, is set to begin trading Thursday at the New York Stock Exchange. It priced 105 million shares overnight at $13, significantly below the prior price talk of 100 million shares at $16 to $18. Admittedly, it was a tough night to price an IPO, with investors having to reset expectations of rate cuts this year on the heels of Federal Reserve Chair Jerome Powell's comments yesterday. Regardless, recent IPO performances have been poor across the board. Birkenstock was one of the last major companies to go public, and that was in early October. Since then, the S & P 500 has risen nearly 11% but, with the exception of Smith Douglas Homes , recent IPOs have notably underperformed: Recent IPOs (from IPO price) BrightSpring Health -15% Kaspi.kz - 1% Smith Douglas Homes +22% Birkenstock + 1% This poor performance is occurring despite the fact that the S & P closed 2023 near an historic high. IPO investors cheered the advance by bidding up the Renaissance Capital IPO ETF (IPO), a basket of recent IPOs, in December, assuming the IPO market would open up. In all of 2023, the IPO ETF surged 53%. That has all reversed. The IPO ETF is down nearly 10% this year, while the S & P 500 is up 1.6%. The old excuses In the old days — before the Covid-19 pandemic — when an IPO priced well below the range, it was typical to say the companies were too young, or they weren't making money. That wasn't the case with BrightSpring or with Amer. The sporting goods maker, for example, has about $4.4 billion in sales and $600 million in EBITDA. Some are citing high debt levels. "The market is punishing over-levered businesses and both of these IPOs were loaded up with debt," Greg Martin at Rainmaker Securities told me. Rather, Martin "would like to see some more traditional unlevered tech IPOs before announcing a trend." Lower prices: Who benefits? Wall Street may be badly mispricing the sentiment for IPOs, but the good news is lower prices increase the chances of buyers making money. After-market returns for IPOs have been poor in recent years, with most of the gains occurring on the first day of trading. Only 56% of last year's IPOs are trading above their initial offering price, according to Renaissance Capital. "We don't mind when investors drive a hard bargain and a deal prices below range," Matt Kennedy at Renaissance Capital told me. "Nothing wrong with an IPO pricing down as long as it trades up, so we'll see how Amer does, not just today but in subsequent quarters." Kennedy agreed that IPO investors have become much more cautious, following poor after-market performances in the last several years. "One overarching trend since last fall is that IPOs need to prove themselves in public markets," he told me. "That means setting and meeting earnings expectations. They no longer get a free pass." What's next? Martin at Rainmaker agrees with Kennedy. "I expected underwriters to be more conservative in their pricing and that's what we're seeing here," he told me. "But another round of poor after-market performance could halt new issuances once again," though he added, "I remain hopeful for an IPO resurgence in 2024." This has implications for IPO hopefuls in 2024. Social forum network Reddit first filed to go public in 2021 and reportedly has been ramping up efforts to go public in March . Other IPO hopefuls include ServiceTitan, which provides software for residential and commercial heating; canned fruit maker Del Monte; restaurant chain Panera Bread; online ticket marketplace SeatGeek; Chinese fast-fashion retailer Shein; and cryptocurrency issuer Circle. Often mentioned as IPO hopefuls are cloud analytics firm Databricks, as well as Rubrik, a cloud data management and enterprise platform backed by Microsoft. CNBC's Jim Cramer, speaking early Thursday on " Squawk on the Street ," highlighted another obstacle for IPO buyers: Investors are getting comfortable returns elsewhere with far lower risk. When David Faber asked why the IPO market was off to such a slow start with the markets so strong, Cramer replied, "I think it's the 5% solution," he said, referring to the ocean of money still sitting in money market funds. "There's just so much money on the sidelines — and it's not as enticing. This market is not as enticing."