Is the IPO market really opening up? A trio of IPOs ( Arm , Instacart, Klaviyo ) have investors excited that we are re-entering a golden age of IPO issuance. Over the weekend, Goldman Sachs’ chief U.S. equity strategist David Kostin said the IPO market was becoming more “normalized,” meaning issuance was starting to pick up. Sounds good, except Kostin issued two caveats: investors should be “wary of IPOs that come to market at extremely high valuations” and profitability was key to after-market success: “We expect profitability will be especially important for upcoming IPOs. With capital markets closed for nearly two years, unprofitable companies have been forced to fund operations by spending cash balances. This experience has driven investors to prefer stocks with high levels of current profitability.” That means investors are looking for 1) much lower valuations, and 2) profitability. Some companies, like Instacart, may indeed satisfy those two requirements. Many other tech unicorns (those with valuations north of $1 billion), perhaps most, will not. Different than the last IPO gold rush The last IPO goldrush, in 2020-2021, was under very different circumstances. Back then, we had a huge rebound in the stock market in mid-2020 along with plummeting interest rates. Those two factors went a long way toward explaining the crazy high valuations IPOs fetched in that period: “The distribution of 2020-21 IPO returns was not especially dependent on valuations, except at the extreme,” Goldman’s Kostin said in a recent note to clients. The macro environment is different today. True, the S & P is on an uptrend but interest rates, the other major macro determinant for IPOs, are much higher than in 2020-2021. Low rates were a major factor in the earlier high valuations: “Real interest rates plunged to a record low of -1.0% during 2020-21 and risk assets surged in price, led by long duration assets, including IPOs,” Kostin noted. “[But] before we see a broad-spectrum re-opening of the IPO market, we still need clarity around interest rates, inflation, and recession potential,” said Eric Bellomo, PitchBook’s ecommerce analyst. What about those lower valuations? A large part of the IPO market is backed by venture capital firms. How excited are they about this “reopening” and much lower valuations? Maybe not so excited. Kostin, citing FactSet, noted that 39% of IPOs since the start of 2020 were primarily financed by VC firms prior to IPO, vs. 23% of IPOs…
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