IPO investors in a record-breaking 2021 issuance rush have so far been disappointed by dismal yields and the outlook for the once-booming market is deteriorating with rising interest rates and insider selling on the horizon.
According to Dealogic, the number of traditional US IPOs last year rose to its highest level since the late 1990s and deal value hit record highs. So far, these public debuts have performed well below their historical averages.
Deals in 2021 have fallen an average of 14% in the six months since the IPO, compared to a historical average of 14%, according to Bank of America.
“A high IPO bid, expectations of higher Fed fund rates, a historically extreme proportion of early-stage/non-earning companies, and perhaps some investor fatigue from seeing so many new companies have taken their toll.” , Thomas Thornton, managing director at Bank of America, said in a note.
Amid expectations of higher interest rates and a return in volatility, the market quickly turned away from risky, growth-oriented companies, particularly hurting small-cap IPOs and those with a long road to profitability.
Electric pickup maker Rivian Automotive was one of the biggest IPOs of 2021 as its market cap briefly surpassed traditional automakers like Ford and General Motors. However, the stock has wiped out all post-debut pop and is trading about 12% below its IPO price.
“I think there is no doubt that the IPO market will slow down this year,” said Ulrike Hoffmann-Burchardi, portfolio manager at Tudor Investment Corp. now a drastic reset in ratings.”
Tech stocks are considered sensitive to rising yields because higher debt costs can hamper their growth and make their future cash flows less valuable.
“We have to see that interest rates stabilize,” said Hoffmann-Burchardi. “When the volatility and interest rate movement is so great, it becomes very difficult for valuations to find and recalibrate themselves.”
Meanwhile, many IPOs that will be held in the second half of 2021 will expire sometime in the next six months. An IPO lock-up period is typically 180 days, during which company insiders cannot sell their shares.
– CNBC’s Leslie Picker contributed to the coverage.
