Is this the return of the initial public offering?

Initial public offerings, or IPOs, were rare beasts in 2022. A report from Boston Consulting Group (BCG) showed a 60% drop in global numbers (from 661 to 221) compared to the year before [1]. Deterring companies from making the leap from private to public was a perfect storm of macroeconomic and market conditions, which kept the so-called IPO window firmly closed.

The causes of this market turbulence were many and varied. Consumer prices around the world rose sharply, as the war in Ukraine further twisted supply chains that had yet to fully unfurl from the pandemic. Soaring energy prices and a tightening labour market also helped to push inflation higher.

In the UK and Eurozone, it appeared to peak in October 2022, reaching annual rates of 9.6% and 10.6% respectively, according to the Office for National Statistics and Eurostat. US inflation touched its high point slightly earlier – an annual rate of 9.1% in June 2022, as recorded by the Bureau of Labor Statistics.

Central banks, determined to rein in price increases, moved away from the extremely accommodative policy stances they adopted in the wake of the global financial crisis. Many embarked on a series of interest rate hikes. Since March 2022, for example, the Federal Reserve has raised the US base rate by more than five percentage points, from near-zero to a range between 5.25% and 5.5%.

This higher cost of borrowing, along with the uncertainty arising from several high-profile banking-sector failures in early 2023, stifled growth and investment as fears of recession increased. Public markets were volatile, with tech stocks suffering some particularly sharp declines. All of this combined to create a somewhat off-putting environment for those venture-backed start-ups pursuing a listing. Given that the process can take six months to a year to complete, there’s now a backlog of companies waiting to go public.

Is the window opening? 
Fortunately, several of the elements that led to the tempest are now quieting. Inflation is normalising, we are approaching the end of the rate-hiking cycle and recession fears seem to be fading. Valuations on public markets appear to be stabilising, too. And recent events indicate that the IPO window could be inching open once again.

One of the most significant of these was Arm Holdings' debut on the Nasdaq. Arm secured a valuation of $54.5 billion as it tested the waters for several other tech start-ups [2].

One of those other tech start-ups is Instacart, the online grocery store business. At the time of writing, Instacart had priced its shares at $30, the higher point of the range it had previously indicated, ahead of its first day of trading on Tuesday. Klaviyo, which provides marketing automation software, is also due to list on the Nasdaq this week, while peer-to-peer car rental platform Turo has filed an updated registration statement. Turo’s IPO plans have been on ice since January 2022, but the statement accompanying this filing showed an increase in revenue to $408 million for the first half of 2023, from $333 million for the same period last year [3].

What does this mean for investors? 
While this recent flurry of IPOs is positive, it is not yet clear that listings will return in the numbers last seen in 2021. But strong performances from those mentioned above could help to pave the way and provide encouragement for other start-ups to go public, restoring confidence along the way.

Such a resumption in IPO activity would represent a return to traditional exit routes for general partners. Meanwhile, end investors would surely welcome the potential for increased distributions (post-IPO lockup periods notwithstanding) and a return to normality. For these reasons, this tentative resumption of IPO activity is psychologically significant.

Endnotes 
1. Tech Startups Should Prepare Now for the Next IPO Boom | BCG, July 2023. 
2. Arm valued at $54.5 bln in year's biggest IPO | Reuters Video, September 2023. 
3. Unicorns Are Thawing Out IPO Plans, Crunchbase, September 2023.

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