Everything started off so well. After being swamped by SPACs, initial public offerings took off late in the first quarter and continued into the second. So far this year, 275 initial public offerings (IPOs) have raised more than $96 billion, which is close to the record year of 2000.
However, what began as a strong outperformance year for IPOs has fizzled, as investors have pushed back against IPO prices set in the first half of the year.
IPOs lower prices.
First, in recent weeks, several high-profile IPOs have been forced to significantly reduce the terms of their IPOs.
Take, for example, Weber, which went public on the New York Stock Exchange last week. The company had planned to sell 46.9 million shares at $15-$17 per share, but ended up selling only 17.9 million shares at $14, a 66 percent loss.
Then there’s fruit distributor Dole, which wanted to go public at $20-$23 but ended up pricing at $16, though it did increase the number of shares offered.
Candel Therapeutics also reduced its deal size by 15%.
IPOs have been postponed.
Some businesses did not bother to lower their prices. They recently canceled their initial public offerings (IPOs).
Seven IPOs have been postponed in the last two weeks: Clarios, an ad-tech company, Preston Hollow, a lender, and a biopharmaceutical royalty company. WCG Clinical, a clinical trial services provider, and a wellness company Cadre Holdings, a law enforcement supplier, and The Better Being.
While companies rarely give a reason, most IPOs are delayed due to “market conditions,” which usually means the stock market is in turmoil and investors are pessimistic.
That is not the issue here. Markets have reached new highs.
The issue, according to IPO Scoop’s John Fitzgibbon, is that IPO prices have been set too high.
“The majority of these IPOs go to institutional buyers,” he said. “In many cases, institutional buyers do not want to pay the prices that the sellers wanted,” forcing them to take a cut or walk away.
Why is the market reaching new highs while my IPOs are not?
While the S&P 500 has reached a new high, IPOs have not. The Renaissance Capital IPO ETF is a collection of the top 60 most recent IPOs. It is flat for the year, while the S&P 500 is up 18%.
The fund’s largest holdings peaked in the fourth quarter of 2020 or the first quarter of this year and are now significantly lower than their 52-week highs:
Recent Initial Public Offerings
(percentage change from 52-week highs)
Palantir has a 49 percent market share.
Unity Software has a 38% market share.
Coinbase has a 38% stake.
35 percent of snowflakes
Peloton (32% of the total)
What transpired? For starters, many IPOs are focused on technology and growth. When interest rates rose in February, many investors were hit hard because higher interest rates reduce the value of a future stream of earnings that these companies are expected to generate. Even though interest rates fell, many of these companies did not return to their previous highs.
This resulted in a backlash against not only the prices, but also the valuations of these companies.
This pushback has carried over into the second half.
“The interest is no longer there,” Fitzgibbon said. “It all comes down to pricing. They need to get the right price, and they haven’t been able to do so. The tape tells the entire story.”
While the average IPO is up 10.2 percent this year, the gains have all occurred on the first day of trading. According to Renaissance Capital, the after-market return (the return after the first day) is a negative 8.3 percent. Only 59% of stocks are trading above their initial public offering price.
That, according to Renaissance Capital CEO Bill Smith, is not the kind of return that gets investors excited.
“Good luck convincing investors to postpone vacation plans in order to play those odds,” Smith wrote in an email.
Prospects for the second half of 2021
August is traditionally a slower month for IPOs, but the poor after-market returns are a red flag for IPOs hoping to go public in the second half of the year.
“That usually leads to pricing pressure and a tougher market,” said Matt Kennedy, Renaissance Capital’s senior IPO market strategist.
Among the companies on Renaissance’s watchlist that are expected to go public in the fall are:
Rivian’s formal name is Riviana (electric vehicle developer)
GlobalFoundries is an acronym for Global Foundries, Inc. (semiconductor designer and manufacturer)
Instacart (grocery delivery platform valued at $39 billion)
Genuine Brands (parent of Forever 21 and Nautica)
NerdWallet is a personal finance website (personal finance app)
The term “turo” refers to a (rental car platform)
Premium grocer The Fresh Market, online clothing rental company Rent the Runway, and hot dog chain Portillo’s Restaurant Group are also on the list. Stripe, an online payments company, is also a possible IPO candidate.
Whether or not these firms cross the finish line is determined by “market conditions” and whether or not they are willing to accept the prices that institutional buyers are willing to pay.
Given the poor returns, Fitzgibbons anticipates that pricing negotiations will be more heated than in the first half of the year.
“It’s been a lot of flapping wings and not much flying for investors so far,” Fitzgibbon said.
