US IPO slowdown slams door on tech unicorns looking to cash out

[NEW YORK] The party is over for technology start-ups rushing to go public at ever-higher valuations, as volatile US stock markets have dampened investor appetite for high-growth stocks.

A 6 per cent drop in the S&P 500 index and a 75 per cent rise in Wall Street's fear gauge, as the Cboe Volatility Index is known, since the beginning of the year have led many companies to push the pause button on listing plans.

Software startups WeTransfer and Justworks and bitcoin miner Rhodium Enterprise are among the half-dozen companies that cancelled initial public offerings (IPOs) in January, citing adverse market conditions. Other postponed listings include apparel chain operator Authentic Brands Group, insurance technology start-up TypTap, and real estate investment trust Four Springs Capital Trust.

"You're going to continue to see probably fewer deals launched than you otherwise would have if the market hadn't gotten a lot choppier here," said Eddie Molloy, co-head of equity capital markets for the Americas at Morgan Stanley.

Most shares of 396 companies that went public in 2021, excluding special purpose acquisition companies, were already trading well below their flotation price as investors worried about frothy valuations - down 28 per cent on average, according to Dealogic.

January's sell-off of technology stocks, driven by the prospect that higher interest rates will make investors more risk-averse, further spooked investors. The tech-heavy Nasdaq ended January nearly 9 per cent lower than it started the month.

IPOs raised a total of about US$6.9 billion in January, down 83 per cent from the same period last year, according to Dealogic Companies with plenty of growth but little or no profit to show were snubbed first by IPO investors.

"The recent and anticipated moves in interest rates is forcing investors to re-value cash flows, growth and risk, translating to a rotation away from the highest growth, riskiest assets across sectors," said Andrew Wetenhall, co-head of equity capital markets in the Americas at Morgan Stanley.

This raises questions about the timing of major technology offerings expected this year, including Intel Corp's autonomous vehicle unit Mobileye, social media platform Reddit and delivery startup Gopuff.

Should market volatility continue, it could benefit direct listings at the expense of traditional IPOs, investment bankers say. In a direct listing a company goes public without selling shares though underwriters, and its stock market debut is less vulnerable to market jitters.

To be sure, IPO bankers and lawyers have said the pipeline for companies looking to go public in 2022 remains healthy.

Several technology unicorns are still planning to go public in the second half of the year.

"Markets loathe uncertainty, so any alleviation of it should improve the market backdrop, especially for IPOs," said Michael Ventura, managing director at RBC Capital Markets.

Tech stocks and the broader market rebounded this week, recovering close to half of their losses in January and giving dealmakers hope the IPO environment will become favorable again soon.

Jimmy Baker, president of B Riley Securities, said the IPO market recovery may start with companies that generate strong cash flows going public, as investors with little risk tolerance for loss-making unicorns are attracted to offerings that promise to deliver yield.

"There's not a lot of receptivity to IPOs. (However), we expect in the near future, there will be receptivity to yield-oriented opportunities," said Baker.

REUTERS