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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Think of Wall Street and “sensible” is not usually the first adjective that springs to mind. Thoughtful and boring don’t usually top lists either, particularly amid images of companies going public with the cheering, champagne and confetti that surround newly minted multimillionaires and billionaires as they press the opening bell.
Ask bankers and investors though, and those are exactly the buzzwords they’re seeking for the 2024 vintage of initial public offerings. Consider it a sign of a market still in need of rehabilitation after more than two years in the doldrums since its last wild party. Given that several of the biggest deals from 2021’s IPO boom, including electric vehicle maker Rivian Automotive and dating app Bumble, are still down at least 75 per cent, an unspectacular market sounds just great.
Companies going public have sold shares worth $10.5bn in New York so far this year, according to Dealogic. That’s up sharply from the $3bn-odd managed by this point in either of the past two years but compare it with 2021’s full-year record of $154bn and the scale of the lingering hangover is clear.
The trick, say bankers, is to find a steady middle ground that reassures still-scarred investors they’re unlikely to get hurt so badly again and also calms executives’ fears that they’re joining a rollercoaster.
“I really want the markets to be boring for a bit,” says one senior IPO banker of the current crop. “Let’s give people comfort that it’s not going to be hot-cold-hot-cold, and so on. That would allow us to ultimately attract more companies back to the public markets.”
The number and quality of companies opting for an IPO matters for investors, who can reasonably feel they’ve lost out on a lot of value creation in recent years as private funds got to enjoy the run-up in value of so-called unicorns before handing them over to the public. Its also hugely important for a lot of those private equity investors who are sitting on 28,000 unsold companies worldwide worth some $3tn, according to consultancy firm Bain. A reliable IPO market would help ease that logjam.
Investors are regaining some confidence that would-be public company executives are equally as committed to a steady IPO market, rather than the drama of 2021.
“When we were talking to companies within our portfolio and outside in 2020 and 2021, the word efficiency was very rarely used, nor was ‘profitability’. Today it’s very different,” said John Wolff, chief investment officer for the public equities fund at venture capitalist Insight Partners. “Management teams are being much more thoughtful about the IPO being a point along their journey as opposed to a mad dash to get public.”
This week produced two examples of what IPO insiders want to see. Centuri, a carve-out from utility Southwest Gas, raised $260mn after pricing its shares at the top of the range it had suggested, and gained 10 per cent on debut. Strong demand for Ibotta, a consumer rewards app, allowed it to sell more shares, worth $577mn, and price above its planned range. It rose 17 per cent.
Last week safety-testing company UL Solutions raised $946mn in the year’s second-biggest deal and jumped 21 per cent on its first day. A 130-year-old company whose logo is more familiar to US consumers than its name is the very definition of an unshowy IPO. Of the 10 biggest deals so far this year, only one fell on its debut. The best-known, Reddit, is still 20 per cent above its IPO price.
Broader market direction has clearly been key to the recent IPO thaw. Since late October, the S&P 500 is up just over a fifth. Its much easier to lure companies into the public glare when valuations are improving. While stocks have slipped in the past three weeks, IPO followers are taking heart from this week’s newbies, which managed to pop higher despite the S&P 500’s longest multi-day losing streak in months.
Perhaps the best example of what IPO insiders are seeking comes from the float of Astera Labs. A day before Reddit’s IPO caused waves, the artificial intelligence infrastructure group raised $713mn and surged 72 per cent on debut even though its founders increased the price and size of the deal — but resisted advisers’ suggestion of yet more.
“Ideally they would have liked the deal to be even bigger but where we are with the business we didn’t really need all of that money,” Jitendra Mohan told the Financial Times on the day, before heading to a quiet dinner with his co-founders Sanjay Gajendra and Casey Morrison and their families. “Then it’s a flight home tomorrow and back to work,” he added.
These IPOs need to keep performing over the next few months if others are to follow their lead. But Astera’s moderation, and its shares at nearly double their IPO price, suggests that a sensible approach is so far being rewarded.
jennifer.hughes@ft.com
