With the high-interest rate and a market full of uncertainty, this could be a challenging year for businesses looking to sell.
The last year has been an unforgiving year for the IPO market, and analysts predict that 2023 will likely be the same unless the economy proves more resilient than was expected.
There was a record amount of IPOs in 2021, primarily due to a booming stock market and low-interest rates. Companies that went public in 2021 in the U.S. made $155 billion in the proceeds of IPOs, according to a study by Ernst & Young. But the number of public companies fell dramatically this year, as the market became volatile as an increase in the Federal Reserve hiked interest rates to control the rise of inflation that has been averaging for decades. In the first quarter of 2022, the proceeds from IPOs were only $4.8 billion.
An economic environment characterized by high-interest rates and a weak stock market isn’t favorable to taking risks, which is what investors are dealing with. The IPO market is more active in times of optimism and economic growth as investors are more inclined to take risks, and businesses tend to be more prone to seek IPOs to increase capital investment, according to Andrew Lokenauth, financial market researcher as well as a professor in the University of San Francisco School of Management. However, when there is a recession or economic instability and recession, the IPO market could be slow since the investors tend to be more cautious, and businesses are less likely to take their business publicly.
Therefore, if the market picks up, investment companies will choose fewer companies to invest in as well as private equity. Venture capital fund management firms will keep trying to revamp portfolio companies, focusing on profit — one of the primary reasons driving the mass of layoffs in the tech industry, says Tom Taulli, author of High-Profit IPO Strategies Find Breakout IPOs for traders and investors.
Many privately-held tech unicorns have strong potential. Although it could require these companies to take some time to adjust to low valuations before they’re prepared to venture into capital markets, especially since many of them have had significant capital raises this year. If they decide to become public companies, this will be in the second half of 2023.
“Those aiming for IPOs may get their ducks in a row in 2023 but have their eyes set for a longer time horizon for pulling the trigger on an IPO,” says Chenxi Wang, founder and managing general partner at San the city-based venture company Rain Capital. Other alternatives to exit, she adds, like Strategic mergers or acquisitions, are likely to remain being considered.
Many companies that had hoped for IPO this year are delaying until at most 2023. For instance, the car-sharing firm Turo applied in the hopes of an IPO on January 20, 2022, which remains to wait. Other companies, including Stripe, Klarna, Plaid, Discord, and Arm, have been rumored to be considering IPOs however they have yet to make an announcement. Certain companies, such as Stripe, have employee stock options that are close to expiring after 10 years. There’s more pressure for the companies to IPO to provide their employees some liquidity, says Dan Siciliano, CEO, and co-founder of Phoenix-based financial service company Nikki and an ex-professor in the law department at Stanford Law School.
Publicizing a company through SPAC, a special-purpose acquisition company (SPAC), was once a popular option and is now a non-issue. Wang says that most investors still view SPACs as risky, unpredictable, and unreliable. However, they’re not going to disappear. “There should still be a place for SPACs,” she states, “but that level of SPAC feverishness in 2020 was nearly on the verge of insanity, which we don’t expect to see going forward.”
