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The Market Minute: Tough Market Conditions Have Squeezed The IPO Window, But The Pipeline Remains Robust

From crunchbase news

We’re almost halfway through the year, and the current market for IPOs is far from where it was when 2021 began.

Reports of inflation spurred a far-reaching stock selloff last week, with tech stocks in particular being hit hard. That, in turn, has led to an expected slowdown for IPOs in the near future.

IPO research firm Renaissance Capital has tamped down its expectations for the second quarter of the year, as the first quarter was lower than expected in terms of the number of pricings.

“We’re beginning to see activity slow as aftermarket returns decline,” said Matt Kennedy, a senior strategist at Renaissance. He added that more than half of 2021’s IPOs were trading below their offer price, excluding SPACs.

Indeed, some of 2021’s prominent venture-backed IPOs were included in that group, such as clothing resale marketplace Poshmark and dating app Bumble, which on Tuesday closed at $34.61 and $41.44, respectively. And aftermarket returns being negative has led to investors being more cautious with new issuers, Kennedy said.

It feels like some of the trends of 2020 are unwinding, Thomvest Ventures managing director Don Butler said in an interview.

Last year saw the government issuing fiscal stimuli while at the same time there was compressed consumer spending and low interest rates. That led to more activity by retail investors, whereas now with COVID-19 vaccination rates picking back up and society reopening, “it’s starting to shift from that saving money, that fiscal spending money, back into spending it,” Butler said.

We’re seeing less money going into the stock market or savings and back into consumption, and less consumer saving means inflationary pressure.

While the IPO window has narrowed for now, given the market conditions, there’s still a robust pipeline of companies waiting to go public, Kennedy said.

Marqeta and are among the most recent companies to file for an IPO, and others, such as Krispy Kreme, have filed confidentially for an IPO. Other companies Renaissance Capital is tracking for a potential IPO this year include FlipKartAllbirdsFreshworks, and Automation Anywhere.

“We’re still tracking a number of deals that I think are preparing for 2021 listings, just keeping in mind that at least over the next month, companies will need to either delay or come at attractive valuations to get investors interested, given the new market dynamic here,” Kennedy said.

The flood of SPACs that characterized the public markets in 2020 and early 2021 has also slowed down. This has been a record year for SPACs so far, with 318 SPAC IPOs raising nearly $102.5 billion in gross proceeds.

But while there are still some SPACs forming, the “flood is over, at least for now,” Kennedy said. The number of SPACs looking for target companies to acquire is in the 100s, and there are more than 100 pending acquisitions, which means SPACs will be a big part of the public markets for the rest of the year as well.

“We could see more SPACs continue to poach IPOs, but just like with the IPO market, that environment is more challenging and they should see tougher valuation pushback from shareholders, who are less likely to approve any deal now regardless of fundamentals,” Kennedy said.

Butler suspects that the SPACs and IPOs of the next six months will have less retail participation. And with how SPACs in particular have been performing, the investors will be looking for higher-quality companies.

“Whether IPO or SPAC , I do feel like the bar for companies, especially with the other concerns like inflation, has gotten higher,” Butler said.