Hopes rise for IPO recovery after September deal rush

Klaviyo

29/09/2023 15:52

By Echo Wang and Pablo Mayo Cerqueiro
       NEW YORK/LONDON, Sept 29 (Reuters) - Bankers and
investors are embracing a degree of optimism for the IPO market
following a slew of major market debuts in September that made
for one of the busiest months since the start of 2022.
    So far this year there have been $423 billion worth of
equity capital markets transactions, a 5% increase from the same
period last year, according to Dealogic data, though this total
remains a far cry from the record levels of 2021.
    The performance of a spate of high-profile IPOs is being
closely watched as an indicator of investors' appetite for new
issues. 
    In the last four weeks, at least 25 companies in the United
States and Europe have joined the stock market, raising hopes
that a recovery may be in sight after a lengthy drought in fresh
listings.
    "We're definitely seeing a bit of a soft open in the IPO
market", said Lizzie Reed, global head of the ECM syndicate desk
at Goldman Sachs. "The last cohort of IPOs ... provided a case
study for issuers who might be contemplating markets access." 
    British chip designer Arm Holdings  ARM.O , marketing
automation firm Klaviyo  KVYO.N  and grocery delivery app
Instacart  CART.O  raised more than $6 billion combined in their
September debuts in New York, accounting for over a fifth of
total proceeds raised by IPOs in the U.S. and Europe this year.
    All three companies priced their IPOs at the top end, or
above, their indicated price range, highlighting support from
investors.
    But while shares rallied on their first day of trading, they
have since retreated. Arm and Instacart shares briefly fell 
below their issue price, suggesting there is still some way
before the IPO market fully recovers.
    
    REBUILD MODE  
    "We're still in a rebuild mode for the market more than an
absolute bull market," said Robert Stowe, head of Americas ECM
at Barclays. "But we are starting to see more engagement (in
IPOs) from both sides."     
    Bankers are not expecting a deluge of deals to rush to
market as a result of the recent issues. 
    "It's encouraging to see deals being priced, but it will
continue to be a gradual re-opening of the market rather than
the floodgates opening," said Suneel Hargunani, co-head of ECM
at Citigroup for Europe, the Middle East and Africa (EMEA).
    In the last month, technology has been the dominant sector
for new issues in the U.S., but the full quarter has offered a
more varied IPO class.
    Medical glass producer Schott Pharma  1SXP.F  debuted on the
Frankfurt Stock Exchange on Thursday, with shares closing 16%
above the IPO price. In July, German hydrogen firm ThyssenKrupp
Nucera  NCH2.DE  and Romanian energy producer Hidrolectrica went
public in their home countries.
    IPO candidates on both sides of the Atlantic share a common
characteristic - they are either already profitable or show a
clear path to profitability.
    Arm, Instacart and Klaviyo were all profitable at the time
of their listings. Klaviyo's shares are now trading at a 21%
premium to their IPO price.
    "The success of (the) Klaviyo (IPO) is a strong affirmation
of profitable growth being a path towards a rewarding valuation
by the public markets," said Ross Devor, partner at Thoma Bravo,
a software-focused private equity firm.
    “Most of the companies in the pipeline, if they're not
profitable, they have a definitive path to profitability.” said
Samir A. Gandhi, a capital markets lawyer at Sidley Austin.
    
    STABLE OWNERSHIP 
    Notably, some of this year's most emblematic IPOs have
attracted cornerstone investors as a way to reduce risk and
ensure stable ownership.
    "For companies that are market leaders in their sector and
have a long-term thematic element, we find that investors are
more likely to consider a cornerstone investment," said Stephane
Gruffat, co-head of ECM in EMEA at Deutsche Bank.
    That was the case of Arm, a leader in chip technology, which
saw an array of clients including Nvidia and Apple snap up
shares, and Schott Pharma, which attracted the Qatar Investment
Authority, as it pushes into the growing market for injectable
drugs.
    A narrowing gap between buyers' and sellers' views in
valuation has also paved the way for more IPOs to come to
market.
    Instacart agreed to sell shares to investors at a $9.9
billion valuation in its IPO, a fraction of the $39 billion it
fetched in a private fundraising round in March 2021 amid a
pandemic-induced boom for online grocery deliveries.
    For its part, SoftBank bought the 25% it did not already own
in Arm at a $64 billion valuation in August to then sell shares
at a lower price a month later.
   "For the IPO market to open more broadly in the first quarter
in 2024 ... we need the 2023 IPO cohort to continue to perform
well," said Josh Weismer, head of U.S. ECM, Mizuho Americas.
"And the market needs a bit more clarity from the Fed." 

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Year-to-Date Global ECM Volumes: 2018-2023    https://tmsnrt.rs/48zw1GD
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 (Reporting by Echo Wang in New York and Pablo Mayo Cerqueiro in
London; Editing by Anousha Sakoui and David Holmes)
 ((Pablo.MayoCerqueiro@thomsonreuters.com))