Market downturn triggers longest U.S. tech IPO drought in over 20 years

Market downturn triggers longest U.S. tech IPO drought in over 20 years
Market downturn triggers longest U.S. tech IPO drought in over 20 years

The year-to-date stock market downturn has caused the longest drought in U.S. tech stock prices this century, with experts cautious about the pace of a recovery even after tentative signs of life in other sectors.

Wednesday will mark 238 days without an IPO worth more than $50 million, surpassing previous records set in the aftermath of the 2008 financial crisis and the dotcom crash of the early 2000s, according to research by the Morgan Stanley’s Technology Capital Markets team.

The US stock market has been rocked this year by the Federal Reserve’s battle to reduce inflation through aggressive interest rate hikes. Higher rates affected stock market valuations by reducing the value of future earnings and raised fears that the economy could be pushed into recession.

High-growth tech stocks dominated last year’s record IPO market and saw some of the biggest gains during the stock market boom, but they’ve also been disproportionately hurt by this year’s sell-off. .

The tech-dominated Nasdaq Composite has fallen nearly 28% so far this year, compared to a drop of just over 19% in the S&P 500, while the Renaissance IPO index, which tracks US listed companies over the past two years, is down more than 45 percent.

“There is enormous uncertainty in the market right now, and uncertainty is the enemy of the IPO market,” said Matt Walsh, head of technology equity capital markets at SVB Securities.

“I think we’ll need to see some stabilization in the outlook and investors pull back to buy existing government securities before they’re ready to move away from the risk curve and buy tech IPOs.”

Life insurer Corebridge completed the first billion-dollar U.S. IPO since January last week, and the early and cautious reception highlighted investor wariness of even the most well-established and most profitable.

Even after the Corebridge deal, overall U.S. IPO volumes are down 94% year-over-year, with just $7 billion raised so far in 2022, down from $110 billion. billion at the same time last year, according to Dealogic data.

Corebridge was being watched closely as a sign of investor appetite for further deals. But Nicole Brookshire, a partner at technology listings law firm Davis Polk, said other factors such as weak earnings reports could have “a bigger impact” on new issuers’ prospects. technologies.

“Guidance has deteriorated with some companies and sectors [and] many companies are feeling the effects of macro headwinds and this is influencing valuations,” she said.

S&P 500 IT groups roughly hit second-quarter earnings estimates, FactSet says, but third-quarter forecasts have been revised down several times, with earnings now expected to fall 4% year on year .

Many tech groups have responded to the downturn with a greater focus on cutting costs and showing progress toward profitability, but Brookshire said the companies would need time to show the changes are working.

“Last year there was little discussion about profitability [among IPO candidates]. Now there is more, but the problem with moving from a growth story to a profit story is that it takes time for issuers to be able to prove their progress.

A more positive factor prolonging the drought, SVB’s Walsh added, is the fact that tech companies raised so much private capital before the recession that “there isn’t the same sense of urgency”. He said he expected “a small group” of companies to still try to register this year, but said most had already pushed back plans to 2023.

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