Market downturn sparks longest US tech IPO drought in over 20 years

The stock market downturn since the beginning of the year has caused the longest drought in US technology listings this century, with analysts cautious about the pace of a recovery even after tentative signs of life in other sectors.

Wednesday will mark 238 days without a tech IPO worth more than $50 million, beating previous records set after the 2008 financial crisis and dot-com crash of the early 2000s, according to research from the Tech – Morgan Stanley equity markets teams.

The US stock market has been rocked this year by the Federal Reserve’s struggle to curb inflation by aggressively raising interest rates. Higher interest rates have impacted stock valuations by reducing the value of future earnings and have raised fears that the economy is being pushed into recession.

High-growth tech stocks dominated last year’s record-breaking IPO market and posted some of the biggest gains during the stock market boom, but they’ve also been disproportionately hit by this year’s sell-off.

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The tech-dominated Nasdaq Composite is down nearly 28 percent so far this year, compared with a little more than 19 percent drop in the S&P 500 during the Renaissance IPO Index, which tracks U.S. companies that have been listed over the past two years , this does have dropped by more than 45 percent.

“There is a tremendous amount of uncertainty in the market right now, and uncertainty is the enemy of the IPO market,” said Matt Walsh, head of tech equity capital markets at SVB Securities.

“I think we need to see the outlook stabilize somewhat and investors get back in to buy existing public securities before they’re ready to move further out on the risk curve and buy tech IPOs.”

Life insurer Corebridge last week completed its first $1 billion IPO in the US since January, and the cautious early admission highlighted investors’ caution even towards more established and profitable companies.

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Even after the Corebridge deal, total US IPO volume is down 94 percent year-on-year, with only $7 billion raised so far in 2022, according to Dealogic data, compared to $110 billion in the same period of the previous year.

Corebridge has been closely watched as a sign of investors’ appetite for more deals. But Nicole Brookshire, a partner at Davis Polk, a law firm that specializes in tech listings, said other factors, such as weak earnings reports, could have “rather an outsized impact” on the prospects for new tech issuers.

“Guidelines have deteriorated for some companies and sectors [and] Many companies are feeling the effects of macro headwinds and that is affecting valuations,” she said.

IT companies in the S&P 500 narrowly met earnings estimates for the second quarter, according to FactSet, but third-quarter guidance has been revised downwards repeatedly, with profits now expected to fall 4 percent year-on-year.

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Many tech companies have responded to the downturn by focusing more on cost-cutting and progress toward profitability, but Brookshire said companies would need time to show the changes are working.

“Last year there was little discussion about profitability [among IPO candidates]. Now there’s more, but the problem with focusing from a growth story to an earnings story is that it takes time for issuers to demonstrate their progress.”

A more positive factor prolonging the drought, SVB’s Walsh added, is the fact that tech companies raised so much private capital before the downturn that “there’s no longer that same sense of urgency.” He said he expects “a small group” of companies to attempt an IPO later this year, but said most have already postponed their plans to 2023.

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