As analysts speculated about a potential comeback in the IPO market, recent chaos in the banking industry has caused cautious investors to reconsider the timing of the recovery.
According to experts, the current troubles in the IPO market are not necessarily due to immediate liquidity issues resulting from exposure to affected banks, such as Silicon Valley Bank, a leading tech startup lender. Instead, it is seen as another unfortunate sign that the market has yet to regain stability and investor confidence.
“The market needs predictability and optimism to see a return in demand for IPOs,” said Chris Manderson, a partner and co-chair of the Business, Corporate and Tax department at Ervin Cohen & Jessup LLP, based in Beverly Hills. “IPOs make a comeback when people feel that the markets are growing or at least stabilizing, and when there is an appetite for risk among investors.”
Manderson mentioned that private equity and venture capital clients have recently expressed concerns about the overall health of the commercial banking market. They are worried about their deposits being at risk in failing banks and the decreasing availability of debt, which has had a negative impact on IPOs.
“Debt has become more expensive, and underwriting standards have become stricter. In the past few years, there was a lot of available capital, and as a result, some less promising companies received funding,” explained Manderson. “However, investors today are not willing to take on that level of risk.”
According to market researcher Statista, 30 initial public offerings in 2023 as of the end of February indicate a potential repetition of the 181 IPOs observed in 2022. This figure represents a significant decrease of 90% compared to the record-breaking 1,035 IPOs in 2021.
Lloyd Greif, president and chief executive of investment bank Greif & Co. in the Financial District, stated that the capital markets are now more likely to embrace a more modest IPO market. The market has adjusted to the realities of a bearish environment and recognizes the exceptional number of IPOs in 2021 as an anomaly.
“Even before the recent banking chaos, the IPO market was already quiet. The combination of 2021’s record-breaking year for IPOs, which was bound to decline eventually, and the underperformance of many IPOs and SPAC deals compared to more stable blue-chip stocks, contributed to the current situation,” Greif explained.
Several Los Angeles-based startups that went public after 2021 have experienced difficulties in the markets compared to more established companies. For instance, FaZe Holdings Inc., a professional esports organization that debuted in July 2022 through a $725 million SPAC merger, saw its stock price drop over 93% from a 52-week high of $24.69 in August to 66 cents per share as of March 28.
Dave Inc., a fintech and banking app company based in West Hollywood, made its debut in January 2022. By March 18, 2022, the stock reached a high of $323.52 per share. However, as of March 28, 2023, the stock has settled around $5.82 per share.
The recent downfall of Silicon Valley Bank, Credit Suisse, and other banks in early March and the negative effects reverberating throughout the banking industry have further diminished hopes of an immediate IPO revival.
“The startup economy was already struggling, and now the banks that primarily serve small, early-stage companies have encountered difficulties. It’s like the sun has gone into a total eclipse,” Greif commented.
Despite the challenges faced by companies that went public since 2021, Manderson believes they are still in a better position compared to those planning to IPO soon.
“At least these companies have achieved their public listing.
They will now experience the market fluctuations and their industry’s ups and downs,” Manderson noted. “IPOs serve as an exit strategy for venture capital investors and the founders of the company. It’s where they can finally gain liquidity. If the IPO window remains closed, they won’t have that opportunity. Additionally, IPOs are a means of raising capital for growth. The IPO market operates in cycles, but investors will have to wait much longer to access that liquidity, and companies will need to explore alternative funding options.”
While the recent wave of negative news dampens hopes for a significant recovery in the IPO market during the first half of the year, Dean Kim, equity researcher and head of research product at investment advisor firm William O’Neil + Co. Inc., suggests that there may still be a chance for a turnaround in the latter half of 2023 if the Federal Reserve changes its course.
“If the Fed decides to cut interest rates in the second half of the year, which is entirely possible, it could lead to a more stable market,” Kim explained. “If we anticipate that the market will reach its bottom soon, possibly in the third quarter, we might see a resurgence of IPOs.”
This possibility gives hope to several Los Angeles-area companies that have recently announced their intentions to pursue IPOs. For example, Peakstone Realty Trust, a real estate investment trust based in El Segundo, expressed its intention to pursue a listing on the New York Stock Exchange. Opti-Harvest Inc., an agricultural tech company in Beverly Hills, initially planned a $35 million public offering but scaled it back to $8 million. These companies, however, declined to comment on their IPO plans.
Meanwhile, National Veterinary Associates Inc., also located in El Segundo, announced its plan to split its operations and debut both segments separately through two separate IPOs within the next two or three years.
Kim emphasized that companies looking to IPO may face challenges during this period. The shrinking availability of capital, combined with other economic factors and uncertainties in the commercial banking market, could make 2023 a difficult year for companies that have yet to go public.
“Companies usually conduct pre-IPO roadshows to gauge investor interest. If they see that investors are hesitant to buy the new shares, they might decide to wait. The key question is whether these companies will have enough liquidity to withstand this challenging environment,” Kim remarked.
Kim also pointed out that the shrinking money supply, primarily influenced by the Federal Reserve’s interest rate hikes, has contributed to the decrease in liquidity. According to Kim, the recent interest rate hike of 0.25% represents the best compromise given the challenging economic situation.
“If the Fed had raised rates by 50 basis points, the market might have collapsed. On the other hand, if they hadn’t raised rates at all, it would have signaled desperation, and their credibility would have been in question,” Kim said.
Greif predicts that the current market conditions will lead to a survival-of-the-fittest scenario, creating opportunities in the M&A market. Some companies will emerge stronger by capitalizing on merger synergies, while others may not survive as standalone entities.
“The market is separating the winners from the losers. It’s better to let companies that are unlikely to turn profitable in the near future die quickly rather than allowing them to become aimless zombie companies,” Greif commented. “This market is removing the illusions surrounding many unicorns.”
The IPO market faces significant challenges due to recent banking industry turmoil, cautious investor sentiment, and economic uncertainties. While the hope for a robust recovery in the near term is diminishing, the potential for a resurgence in the latter half of 2023 remains if the Federal Reserve adjusts its course and market conditions stabilize.