IPO market is ‘seeing a change this year,’ says Renaissance Capital research director

Renaissance Capital Research Director Nick Einhorn joins Yahoo Finance Live to discuss the performance of the IPO market.

video transcript

BRIAN SOZZI: These are difficult times for market debuts. 2022 has seen just 17 IPOs. That’s a far cry from the 397 debuts we saw in 2021 that grossed $142 billion. Renaissance Capital, however, says we may not return to last year’s highs, but also says investors will miss out if they ignore upcoming companies brave enough to actually go public this year. For more information, please welcome Nick Einhorn, Research Director at Renaissance Capital. Nick, where did all the initial public offerings go?

NICO EINHORN: Well, it’s really a combination of a few things. Last year was an extraordinary year for IPOs, as you said, almost 400 of them. And most of them traded pretty well for most of the year. But starting in October, November, we really saw a pretty steep drop in growth-oriented stocks, which obviously a lot of IPOs tend to be, especially high-growth, high-loss companies like a lot of the big names in software and other tech names that have fueled the IPO boom in 2021.

So really, we’re seeing a reversal this year. Things started very slowly as people dealt with those consequences. And then I think we may have been ready to see a recovery starting in March. But then, obviously, the news from the Ukraine came out and that also closed everything.

So I think at this point we’re expecting a few things to happen. We need the markets to stabilize a bit, especially the Renaissance IPO Index that we track which reflects the performance of recent IPOs. Right now the average 2021 IPO is down, I think it’s over 20% of its issue price.

So we need that number to stabilize a little bit, hopefully improve a little bit as well. And then we also need to see a little more valuation consensus between issuers and investors. I think part of the reason we had so many IPOs last year was because valuations were very high in many places. And so, companies wanted to take advantage of that.

And now we’re in a state where they’re not going to be able to get the valuations that they got in 2021, especially, again, the high-growth tech names. So they will have to figure out what the correct valuation level is. For example, we saw last week that Instacart dropped its internal rating by something like 40%. And that is kind of a sign of the kind of correction that we will need to see before IPO activity picks up again.

JULIA HYMAN: Hey, Nick, I’m Julie, although… it’s Julie. As we look at these companies lagging behind, what do you think is the greatest risk in doing so, particularly for companies that are already huge in private markets? Is there a downside to waiting?

NICO EINHORN: Yes I think so. I mean, most of these companies have a lot of employees with a lot of stock options and other assets that are going to want to liquidate them or at least start to be able to get some of those gains. And I think we’ve been, in the last decade or so, we’ve been in an environment where you can stay private and assume that your private valuation is going to continue to rise just because there was so much money in VC that has driven the profits in private companies.

But I think it’s not very clear if we’re still in that environment. And now, if you wait too long, you’ll get unhappy employees and you may not be able to get new money from venture capitalists to keep everyone happy. And obviously you always want to go public when your business is doing well. So if you wait too long until your growth numbers go down a lot, you start to see more competition if you’re in a new industry, then I think there’s a risk that your company isn’t as exciting a prospect for investors as it is. it would be now.

JULIA HYMAN: I mean, on the other hand, Nick, we’ve seen a lot of examples of companies that maybe if they didn’t go public too soon, but… I don’t know, the timing hasn’t been the best. You pointed out that there has been a lot of underperformance over the last year. The class of 2021, so to speak, whether the companies had IPOs, or went public through SPACs, or went public, I mean, the field is full of companies that have really underperformed since then.

NICO EINHORN: Yes, exactly. And I think, again, that’s because the valuations that a lot of them came to and some of the names on this list were definitely stretched by historical benchmarks. And particularly in software, for example, we saw a lot of companies go public with more than 20x future revenue, which is a very high multiple by historical standards.

So I think the good thing is that from a public investor standpoint, there will be more room to push back valuations and make sure companies are reasonably priced. I think in 2021 there was a feeling of not wanting to miss out on the boom. And what our research has shown in the past is that when the market — when the IPO market slows down, it becomes a much more favorable environment for investors to make money in it.

After past downturns, when you look back to the dotcom bubble, 911, the average IPO coming out of a downturn tends to top by more than 20% during the first three months it’s public. So because it’s more of a buyer’s market now than it was last year, there should be better returns for investors for IPOs that are brave enough to come out now or in the next few months.

BRIAN SOZZI: Are there a couple of IPOs that are likely to hit the market soon that could help change sentiment?

NICO EINHORN: Yes. It’s hard to say exactly which ones, but we’re tracking: First of all, there are a lot of companies that filed late last year or early this year that we know are itching to go public. And some of those, I think, are names that could emerge in this environment that are maybe a little bit more mature, that are profitable. Bausch & Lomb, the eyewear brand, Fogo de Chao, the restaurant chain, have both gone public in the past, so investors know those stories pretty well.

There are a lot of energy names that are registered, obviously where oil prices have gone this year could be attractive. And then, beyond those that have come forward, we know that there are a lot of companies that we track that are looking for IPOs – our watch list of private companies, which we put together, has over 200 names that we think are actively considering an initial public offering.

And not all of them will be in 2022, obviously. But we do know that there has been news earlier this year about companies like Mobileye, Sotheby’s, L Catterton, the private equity firm, talking about all kinds of IPOs for 2022. So I think maybe some of them have been delayed from the first half of the year to the second half. But we know that there are companies that want to go public, and I think they will be monitoring an opportunity.

BRIAN SOZZI: All right, we’ll leave it there. Nick Einhorn, director of research at Renaissance Capital, nice to see you this morning.

NICO EINHORN: You too. Thanks.

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