Investors, burnt by the class of 2020 and 2021 initial public offerings that trade underwater, are cautiously dipping back into the fray if the deal is sweet enough.

That’s the takeaway from KKR & Co’s latest survey of buyside investors with more than US$10 trillion in assets, showing 43 per cent of investors are looking for IPO candidates to provide a 20 per cent to 30 per cent discount to their listed peers to feel comfortable about investing.

While that’s an improvement from the 53 per cent recorded in a similar survey late last year, the discount sought remains steeper than the typical 10 per cent to 15 per cent range, and indicates investors are still reeling from billions of dollars they pumped into hundreds of IPOs in 2020 and 2021 that remain in the red from their offering price. 

Skyhigh valuations were part of the problem, with investors now looking for a fair value that “makes sense” post-IPO, according to David Bauer, head of KKR’s head of equity capital markets.

“There is a bit of a ‘lost generation’ of IPOs that may not recover because they don’t have the right shareholder base, or they’re too illiquid, or have the business models that have yet to be proven out,” he said.

Even after equity markets have bounced back from the selloff last year, only a fifth of those listings dating back to the heyday are trading above their IPO price, Renaissance Capital said. 

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To be sure, the general investment sentiment has improved. 

The 32 long-only accounts and 35 hedge funds polled are putting capital to work, according to KKR’s survey. Over half of long-only funds and 40 per cent of hedge funds are holding less than 5 per cent of their assets in cash. 

And two-thirds of those polled are optimistic about the IPO market making a comeback in the next nine months. 

But it takes a bit more to get their allocations. Gone are the days when investors would readily accept growth companies that have an interesting concept but are nowhere near profitable. 

Only 3 per cent of those polled said it would be alright for companies to reach profitability in two years or longer after their IPO, drastically lower than the 23 per cent in a similar poll late last year. A fifth of investors said they would like to see companies being profitable at the time of their listing, up from 15 per cent late last year. 

Investors are seeking assurances when they are approached with an IPO. More than a third said they would meet the company at least three to four times before making the decision to invest, and over 60 per cent said they favour so-called “de-risked offerings” where a cornerstone or an anchor investor would be present for new deals. 

“There’s definitely more conservatism and caution among investors today,” Bauer said. “I think companies that have earnings, revenue, visibility and stability around those projections are the types of businesses the market is readily open for.”

There’s hope, Bauer added, “this next class of IPOs will likely be better set up and better suited for the market.” BLOOMBERG