Initial public offerings are back. Maybe.
Last week was a potential watershed moment for the long-dormant IPO market, as a pair of technology darlings — Reddit Inc. and Astera Labs Inc. — and Swiss skin-care company Galderma Group AG went public with a rush of investor demand that sent their stock prices soaring. To investors hoping for a revival of equity debuts, this was exactly what they wanted to see.
But now it needs to last.
“For the market to reopen you need this cohort to work on balance, you need sellers to think they’re getting an acceptable valuation, IPO buyers to make some money and the macro backdrop to stay firm,” said Tom Swerling, global head of equity capital markets at Barclays Plc. “That’ll open up demand for the center of the IPO bell curve.”
In the first few days, the group has mostly done just that. Reddit rallied 48% on Thursday after pricing its deal at the top of a proposed range a day before Galderma debuted to fanfare in Switzerland with a US$2.6 billion offering — the world’s biggest since ARM Holdings PLC in September. The gains came after Astera fired the starting gun, soaring from its US$36 pricing to US$70 in three sessions.
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Last week’s deals “illustrate the depth of the market for quality companies,” said Seth Rubin, head of equity capital markets at Stifel Financial Corp. “But I still believe we’re a couple of quarters away from a broad reopening and investors will continue reviewing deals on a company-by-company basis.”
Consider CVC Capital Markets-backed Douglas AG. Bankers priced the offering in Frankfurt on Tuesday at the bottom of its advertised range, and the shares still slumped. The company is “idiosyncratic,” said Tatjana Xenia Puhan, chief investment officer at Copernicus Wealth Management SA. “What investors have done is expressed their concern about this with the drop in the share price after the IPO.”
Busy Week
Last week was the busiest for US and European IPOs since September, with US$5.5 billion raised, according to data compiled by Bloomberg. That’s on top of the US$9.1 billion raised through share sales for companies and their largest shareholders. With global benchmarks soaring to record highs, even 2023 IPOs are getting a boost. Among the companies that have raised more than US$250 million on US or European exchanges this year, the average stock has returned 27%.
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As is the case for the stock market at large, the euphoria surrounding artificial intelligence is driving much of this action. With investors leap-frogging one another for exposure to anything AI-related — Nvidia Corp. has added more than US$1.1 trillion in market value this year alone — still-private companies are trying to incorporate it into their pitches.
Reddit touted the ability for customers to license data on the platform to train AI models. Astera, which had Nvidia’s Jensen Huang in its roadshow video, is building products that enable the “mainstreaming” of AI and machine learning in the cloud, according to its website.
The enthusiasm will likely drive deals from IPO candidates that can “showcase their relation to AI,” as well as those with very strong cash flows and growth prospects, according to Kyle Stanford, lead VC analyst at PitchBook. Microsoft Corp-backed data security startup Rubrik Inc. and health-care payments company Waystar Technologies Inc are among those that Bloomberg News has reported to be getting filings in order.
One key area of the IPO market is private equity sponsors who rely on new issuance in part to return money to their investors, or limited partners, as they acquire new companies to keep the cycle of investments flowing. After central banks globally hiked interest rates and the IPO market shuttered, the industry has increasingly faced pressure from investors demanding returns despite exits being difficult.
As a result, some firms moved ahead with offerings despite lacklustre demand. KKR & Co-backed BrightSpring Health Services Inc went public with a large debt load, and the stock is down 13% since its US$693 million IPO priced in January below its marketed range.
Waiting For PE
As the market for new issues strengthens, Wall Street is mixed about when PE firms will bring IPOs to the market. Davis Polk & Wardwell partner Michael Kaplan says PE-backed companies won’t join the rush “as quickly or significantly, given their companies tend to be higher leveraged and those deals will be tougher.”
But Barclays’s Swerling disagrees, saying the private equity community is “laser focused on these four IPOs because of the need to return capital,” with Douglas and Reddit helping to “provide a better guide for the majority of assets” compared to Astera and Galderma.
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EQT AB-backed Galderma in particular stands out. The 21% rally after pricing its IPO at the top end of a marketed range reinforced the notion that the market is open for “quality companies,” said Liberum strategist Joachim Klement.
These mixed reactions are understandable considering the uneven recovery from the worst year for new share sales globally since 2012.
In Asia Pacific, just US$10 billion has been raised through IPOs this year, the lowest total for that period since 2016, as investors retreat from greater China, data compiled by Bloomberg show. IPOs in the Persian Gulf, on the other hand, have drawn ample investor interest as governments have gone on a listing spree in the last few years to fund their diversification away from fossil fuels. Parkin Co PJSC, Dubai’s public parking business, was 165 times oversubscribed, attracting a record US$71 billion worth of orders.
As the market heals, investors and bankers aren’t expecting a quick return to the go-go days of 2020 and 2021 when more than 5,000 companies globally raised more than US$1 trillion in a raucous two-year stretch. There’s a more sober attitude after string of false starts last year in which high-profile companies went public and struggled to maintain strong debuts.
“In September we thought Instacart and Klaviyo were going to be a renaissance reopening of the IPO market, and then it didn’t happen,” said Kamran Ansari, venture partner at Headline.
So while Reddit and Astera have soared in their first trading days, investors shouldn’t be wary of “drawing too many conclusions,” he said. “We need to remember that an IPO is not the finish line, but a new beginning with a lot of chapters left.”
