The global IPO market took a massive dip in 2022. Proceeds were down 60% to $180B, and there were 45% fewer new listings, at just over 1,300.

  •   The United States saw the steepest dive, coming off a unicorn year in 2021.
  • Asia-Pacific was the most resilient region, comprising about two thirds of the global IPO market in terms of both volume and proceeds. 
  •   As we saw with the M&A market, growth was dampened by inflation, geopolitics, rising interest rates, and a banger 2021.
  •   Performance in 2023 will depend largely on the interest rate environment and economic sentiment. The market may continue to favor private acquisitions, as we saw in 2022.

After 2021 set records for both the IPO and M&A markets, 2022 saw both cool way down. The IPO market saw an even bigger pullback than broader M&A, driven by bearish sentiment in public markets.

The fall in IPO activity was in line with most economic indicators in 2022: gloomy. 2023 has experts guessing; rising interest rates could continue to hamper economic activity and valuations, or we could see a reversal in the interest rate trend.

Some of the year’s biggest IPO’s include:

  •   Intel’s spinoff of self-driving tech firm MobilEye, whose IPO saw it valued at roughly $21 billion, raising about a billion dollars.
  •   Corebridge, another spinoff from AIG, raised $1.7 billion with a $14 billion valuation.
  •   Private equity firm TPG went public with an initial valuation of $9 billion, raising a billion dollars.
  •   Eye care manufacturer Bausch and Lomb IPO’d at about $6.3 billion, raising $630 million.

These top spots are a far cry from 2021, which saw eleven IPO’s valued at over $20 billion, vs. just one in 2022. Perhaps more telling, more than half of those high-flying IPO’s from 2021 have now lost over 60% in valuation since their public offerings.

Back to Reality

The IPO market has changed dramatically since the post-pandemic high of low interest rates, pent-up demand, and investor euphoria. That’s not necessarily a bad thing.

Companies like Didi, Coinbase, and Rivian, each of which were valued at over $60 billion in their 2021 IPO, have now each lost over two thirds of shareholder value. That suggests they likely weren’t worth $60 billion at their IPOs either.

IPO’s in 2021, along with the broader stock market, tended to be heavily overvalued. That has a lot to do with the pandemic, both in terms of heavy government stimulus flowing into risky assets and the frenzy it created for tech company valuations. Those valuations look more sane today, and offer investors the chance to actually get some bang for their buck when companies go public. The reason for better deals largely boils down to two words: interest rates. 

2_Year_Treasury_Rate_Chart_Navy_V2Source: Seeking Alpha

Two-year treasuries, which are a guaranteed debt from Uncle Sam, now yield nearly 5% per year, up from roughly zero for most of 2020 and 2021. New corporate bonds from safe, stable companies will offer even higher yields.

A high interest rate environment gives investors plenty of options for a safe, solid return. Coupled with a less certain economic outlook, high rates leave little reason to pile money into newly public companies, rather than sitting on a safer 5 percent-plus payout.

SPACs: Fizzling Activity, Ticking Clock

SPACs (Special Purpose Acquisition Companies) were one of the biggest buzzwords of 2021. These shell companies raise funds on the public market in order to acquire private companies, usually high-growth tech firms.

The bottom fell out in late 2021, and SPACS truly fizzled last year. There were a whopping 613 SPAC IPO’s in 2021, compared to just 86 in 2022.

More interesting than the number of SPACs created is how many will likely cease to exist in 2023. Most SPACs are given two years to find a target company for acquisition. If they don’t find one, the SPAC must liquidate and give shareholders their money back

There are currently hundreds of SPACs, representing billions of dollars, which will either liquidate or acquire in 2023.

Private Equity Preferred in 2022

While transactions fell across the board last year, private markets did better than public ones in 2022.

Private_Equity_Chart_NavySource: White&Case

2021 ended with sky-high valuations in public markets. The IPO market, particularly in tech, was manic in the valuations it produced. That lead to a tough comedown in 2022.

While IPO activity in the country fell by a whopping 93% and 84% in terms of total valuation and volume, respectively, private equity remained robust in the United States. Valuations and activity in the private markets fell as well, but as the chart shows, the drop wasn’t nearly as severe as the IPO market.

Deal value fell 33% to roughly $700 billion, while the number of deals fell by only 18% to about 3,300 US deals. The reason likely lies in the exclusivity of private transactions.

Private equity is a rather strange part of the American financial system. Opportunities in the space are limited to accredited investors, which usually means only wealthy individuals and institutions get to play ball. This naturally lowers total access to those investment opportunities, and makes private equity a little less sensitive to prevailing market sentiment, on both the upside and the downside.

If rates stay high and public markets stay gloomy, companies will likely continue to look to private equity for fundraising and acquisitions.  

2023: What Comes Next?

Just as 2021 was a sugar rush of pent-up demand from 2020, along with plenty of government stimulus, 2022 was a hangover from that sugar rush. A possible outcome for 2023, and likely a goal for central banks around the world, is to find balance again.

Investors and companies will be carefully watching economic indicators, such as employment and inflation, for clues as to how right the time is to make big purchases or offerings.

If the world can balance inflation with growth, 2023 could mark a continued recovery from the pandemic. If it doesn’t, it could prove an excellent time to invest on both the private and public markets, as companies become bargains again. On the target’s side, private equity or an acquisition may prove a better play than the public market.

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