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US IPO market awakens from long slumber

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2023-07-25

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Last week, a surge of FOMO among IPO investors was evident as Oddity Tech, the parent company of direct-to-consumer beauty brand Il Makiage, staged an immensely successful stock-market debut.

This significant milestone signalled that after an 18-month lull, the IPO market could be on the verge of a revival.

In recent weeks, the major impediments to an IPO resurgence have started to dissipate. U.S. stocks have been on an upward trajectory, nearing new 52-week highs, while volatility has subsided, and inflation has eased. Most notably, investors have regained their appetite for speculative bets.

The key determinant for the IPO market's future lies in the willingness of private company stewards to transition to public ownership.

Daniel Burton-Morgan, the head of Americas Equity Capital Markets Syndicate at Bank of America, affirmed that it's not investor demand but rather the limited supply of companies going public that is constraining the IPO market.

The past sluggish period, however, has allowed many startups to take unprecedented measures, cutting costs and pivoting towards achieving rapid profitability.

This has resulted in a stronger pipeline of companies considering U.S. IPOs compared to before the slowdown.

The fall season is poised to be busy with several major listings on the horizon. Arm, the British chip designer, is looking to list shares in mid-September, targeting a valuation of over $50 billion. Klaviyo, a profitable marketing-automation platform previously valued at $9.5 billion in a private funding round in 2021, is preparing for a debut as early as September.

Car-sharing marketplace Turo is in talks with investors for a debut in the coming months, while the German shoe manufacturer Birkenstock also eyes a public offering, valuing the company at $7 billion or more. Additionally, Instacart, which had planned an IPO over two years ago, hopes for a significant debut in late 2023.

However, bankers, lawyers, and investors acknowledge that 2023 is unlikely to reach the IPO levels witnessed in 2020 and 2021.

During those years, unprofitable startups rushed to go public, buoyed by high valuations awarded by investors. The allure was the potential for substantial future returns, especially when interest rates remained near zero. However, the situation shifted in late 2021 when central banks signalled interest rate hikes, prompting a slowdown in IPO activity.

In the first half of this year, companies going public in the U.S. through traditional IPOs raised a mere $9.1 billion, significantly below the $27 billion average for the same period over the past decade, according to Dealogic.

Despite signs of recovery, plenty of private companies remain hesitant about entering the public markets.

For instance, fintech company Stripe raised over $6.5 billion in private funding earlier this year and has abandoned its 2023 stock-market debut plans. Reddit, a long-discussed 2023 IPO candidate, has no immediate intentions of listing its shares. Some companies, like digital-advertising firm Aleph Group, have even withdrawn their IPO filings with concerns about the economic outlook for the remainder of the year.

Nonetheless, the IPO market is showing glimpses of a resurgence, with animal spirits returning. Investors attending Oddity's roadshow experienced a fervent tone reminiscent of the boom times, signalling the excitement for potential opportunities.

Underwriters of the Oddity IPO reported off-the-charts demand, leading them to raise the price range for the offering. Investors were eager to place orders for $10 billion worth of shares, despite only a fraction of those shares being available for purchase. This heightened enthusiasm indicates a positive outlook for the IPO market as it starts to awaken from its long slumber.

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