Rising Interest Rates Could Bring The IPO Market Back To Earth After A Record-Breaking 2021
This is an excerpt from Deal Flow, Forbes’ daily newsletter about big buyouts, big mergers and the rest of Big Finance. Want a new edition in your inbox every afternoon? Subscribe here.
After a record-breaking year for IPOs in 2021, the pipeline for 2022 is already filling up. Chime, Instacart, Reddit and Stripe are just a few of the hugely valuable startups that could finally take the leap from private to public. TPG is ready to get the party started next week, with a public debut on the docket that could value the private equity firm at nearly $10 billion.
The big names will be there. But what about the rest of the IPO landscape? Will the good times continue to roll, and more records continue to fall? Or will escalating inflation and the potential for rising interest rates cause things to take a bearish turn?
I spoke this week with Rachel Gerring, who works as the Americas IPO leader at EY, to take the temperature of the market as a new year gets underway.
There were nearly 400 IPOs in the U.S. last year that combined to raise more than $142 billion in proceeds, according to data from the IPO watchers at Renaissance Capital. Both of those figures easily outpace any other year since the dot-com boom. Gerring and other experts have highlighted several factors that helped create such fertile ground for debutantes. Between a flood of government stimulus spending, soaring public valuations, a backlog of companies from 2020, low interest rates and the optimism of vaccine rollouts, the past 12 months were something close to a perfect storm.
In the year ahead, though, the forecast looks a little different.
“I’m starting to see some headwinds,” Gerring said.
As one major example, Gerring pointed to the growing likelihood that the Federal Reserve will raise interest rates in the months to come. Part of the public market’s runaway success in 2021 was driven by investors seeking better returns than they might find in fixed-income markets. If higher rates make those fixed-income investments start to look a little more appealing, that could sap some of the public market’s juice.
The pandemic continues, but at this point, it seems like the spigot of stimulus funding has been shut off for good. Plans to move back to the office have been again delayed by the omicron variant, perhaps sparking new pessimism. Many companies are struggling to retain top talent. Add it all up, and Gerring thinks it’s unlikely that public valuations will continue climbing to ever-loftier levels in the months to come.
Last year, it seemed like the IPO window never closed. This year, timing may be of the essence.
“Companies really need to continue planning, because they need to look for and be able to respond to the appropriate market openings when those moments occur that are right for them,” Gerring said. “So, to me, that just continues to put the pressure and focus around planning and planning in advance. Because I think in ’22, as we sit here today, there’s a lot of uncertainty.”
The tech and healthcare sectors were particular hotspots for IPO activity last year. Gerring thinks that will remain the case in the months to come. Indeed, three of the four public offerings that occurred in the U.S. during this past week involved healthcare companies. The EY executive said she’s also keeping a close eye on the industrials sector, where a new infrastructure bill could lead to an influx of spending, and the travel and leisure industries, which could see another surge of interest when the omicron variant begins to fade.
These days, when you talk about IPOs, you can’t only talk about IPOs. The market for SPAC deals has faded considerably from a peak that occurred around this time last year. But it remains a major exit option, with nearly 200 blank-check mergers completed last year, per the website SPAC Research.
“You know, Q1 2021 was out of this world,” Gerring said of the SPAC market. “We’re not going to see numbers like that, but they’re certainly not going away, either.”
It’s easy to think of SPAC deals as true alternatives to IPOs. In one sense, that’s accurate. But in another, not so much. As last year progressed, it became clear that blank-check mergers were better-suited to certain types of companies, ones that were more about promises of a game-changing future than any existing track record. We’re talking about electric vehicle makers, rocket-launch specialists, upstart crypto exchanges—the sorts of companies that lack the established financial history that IPO investors tend to prefer.
“That’s one area where we spend a good amount of time, discussing with companies the differences,” Gerring said. “There are multiple paths of accessing the public markets. What’s the best path for each individual company? I’m not suggesting one is better than the other. It’s more around, what’s better in the sense of accomplishing the company’s and their owner group’s objectives?”
For most of the biggest names—the Reddits and Instacarts and TPGs of the world—the objective still remains an IPO. Some of those companies have been planning their public debuts for several years now, spurred by last year’s ebullience to finally make the leap. Will they still proceed with their listings if the market begins to fade? It’s impossible to predict with much certainty. But Gerring believes a more bullish IPO environment will have a bigger effect on smaller companies. When it comes to the market’s reception, some companies have the ability to create their own weather.
“Are they impacted by some of those headwinds? Yes. To the same degree? Maybe not,” Gerring said. “We’ve always felt that there will be those market openings, those market windows that provide a more optimal time. But for companies that are well-prepared and have been really thoughtful around their approach to their IPO or public listing, I think there will always be a market.”
Just how friendly will that market be in 2022? The planned TPG IPO in the days to come should offer our first real glimpse.