The Market Minute: What’s Behind The Sad State Of Q1 IPOs

After a blockbuster year for the IPO market, the outlook for the first quarter of this year seems quiet.

Concerns over inflation have spurred a massive selloff across the board, with stocks taking a nosedive and the IPO window effectively closing. Companies that went public last year have seen weak performance, with the average 2021 return from the offer price around negative 25 percent, according to Matt Kennedy, a senior strategist at IPO research firm Renaissance Capital. Only about a quarter of last year’s IPOs are trading above issue, he added.

“When the IPO market sees this sort of turmoil, it typically shuts down for at least several weeks,” Kennedy said. “I think we’ll need to see these (2021) names improve before we get future deals. The cycle of this—the way that this plays out—is any future IPO or the first IPOs that get the market going again will need to offer some steep discounts.” 

Just last week, two of the larger deals (Rhodium Enterprises and Four Springs Capital Trust) postponed their public debuts. Pandemic darling Peloton saw its stock price decline around 26 percent in the past month, and it’s not alone. Filing activity has also been down over the last week, Kennedy said, noting that he believes it will continue to be below average going forward. 

“I would anticipate that most private companies are holding off on their IPO plans, and if they attempted to go public, I’m not sure they could,” Kennedy said. “The private markets have been generous, that’s kind of always been the case for the past five years, but many private funds are willing to put money into their portfolio companies and stay private longer. Many companies don’t want an IPO down round as we’ve seen in the past and they want to give them some time to focus on improving their profitability, which will be important.”

Private market investors will likely fund their late-stage companies at the same valuation one more time while waiting for the IPO window to open again, according to Matt Cohen, founder and managing partner of early-stage investment firm Ripple Ventures.

The IPO pause will likely affect “companies in the tech space that have already been overvalued a lot in the private market,” Cohen said. For the companies that are well-capitalized, burning through cash and almost need to go public, investors will likely take the opportunity costs more seriously. 

Health care, biotech startups and companies with impressive growth margins could still be candidates for an IPO at some point in 2022, he said.

Early-stage funding will likely remain active, since recipients have more time until they reach maturity to go public, and we’ll likely see the biggest slowdown in the secondary markets, Cohen added.

“I think that the interest rate rise and inflation fears have been a catalyst, which does happen. The market had been frothy, and companies had been coming public well above the historical average in terms of the revenue multiples, so that just gives them further to fall when we do get to the start of a selloff,” Kennedy said. “We do see a broad-based selloff, it’s hitting virtually every sector.”

Illustration: Dom Guzman

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