IPO Insights Q3 2022

The art of not being

How do you describe something that didn’t happen? Perhaps by what was missing: deal activity, proceeds, returns and investor confidence were nowhere to be found in the third quarter. Or perhaps it is best described by what it actually was: one of the slowest third quarters on record, dominated by a handful of micro-cap, pop-and-drop IPOs, delivering the lowest levels of third quarter proceeds in 15 years.

One thing is for sure—none of the normal metrics have meaning in this quarter. Average first-day returns hit nearly 700 percent with one Chinese garment maker enjoying a 13,031 percent pop (it ended the quarter down 43 percent from issue) (Renaissance Capital, Q3 2022). One single listing (Corebridge) accounted for a whopping 71 percent of the quarter’s total proceeds (Renaissance Capital, Q3 2022). Nine out of ten new listings finished the quarter below issue (Renaissance Capital, Q3 2022).

Sadly, the headline data for the quarter was actually a very slight improvement on the previous quarter. There were 25 new issues in 3Q (versus 21 in 2Q) and around $2.4 billion was raised (versus $2.1 billion in 2Q) (Renaissance Capital, Q3 2022). But, barring an unexpected late-year rally, the year is on track to be one of the worst for IPOs in more than three decades.

“With uncertainty remaining at all-time highs, investors have little appetite for new issues and the few notable listings that did happen in 3Q 2022 were met with significant volatility. Anyone who was thinking about perhaps going out in the fourth quarter will likely now have serious reservations. It is unlikely that  the IPO window will fully reopen until at least the end of the first quarter of next year.” – Conor Moore, National Leader, KPMG Private Enterprise

Little to write home about

The bright light of the quarter, as it was, was the spin-off of AIG’s retirement services and life insurance business as Corebridge Financial (Renaissance Capital, Q3 2022). Raising just under $1.7 billion, the listing single-handedly represented 71 percent of the total proceeds in the quarter (Renaissance Capital, Q3 2022). The stock saw a modest drop on its first day, ending the quarter down 6.2 percent (Renaissance Capital, Q3 2022).

There were only two other deals worth more than $100 million (Renaissance Capital, Q3 2022). Third Harmonie Bio, a VC-backed biotech company, raised $185 million and ended the quarter up 11.6 percent (Renaissance Capital, Q3 2022). AMTD Digital, a Chinese fintech, raised $125 million and has seen significant volatility since then – enjoying a first-day pop of 108 percent and ending the quarter up 500 percent (Renaissance Capital, Q3 2022). The vast majority of the other deals were much smaller. 

Technology deals made up nearly a third of the issues but around half of the proceeds were raised by one company (AMTD Digital) (Renaissance Capital, Q3 2022). Same for healthcare – the sector accounted for a fifth of listings but raised less than a tenth of the proceeds (and that was driven by Third Harmonie Bio) (Renaissance Capital, Q3 2022). Consumer discretionary delivered another 20 percent of the listings, led by a ramen restaurant operator and a hemp cigarette maker (Renaissance Capital, Q3 2022).

“There were no safe havens—regardless of your sector, your business model, your growth story or your path to profitability. Investors don’t know when the window is going to reopen. And, when it does, it is unclear what sectors the market is going to reward.” – Erika Whitmore, Audit Partner, KPMG Private Enterprise

Future trends: Hunker down or get out?

If you were thinking about an IPO in the next few months and now realize your window is shut, you are probably thinking about two options: either you hunker down and wait until the markets reopen or you find another exit strategy.

Hunkering down will likely force some private companies to go looking for new rounds of investment. That could be difficult in today’s climate. Even existing portfolio companies are fighting for capital. And few of the other exit strategies seem less risky. SPAC activity has fallen off a cliff (so, too, has their reputation). And there has been much less M&A activity than one might expect given current valuations.

“Regardless of what path you choose, expect everything to take more time. Investors are extending their due diligence, strategic buyers are waiting to see if valuations might fall further, Boards and management are thinking long and hard before they pull the trigger. What used to take weeks can now take months.” – Shari Mager, U.S. National Leader, Capital Markets Readiness, KPMG

Future trends: Rethinking compensation

The risk is fairly obvious. The valuation of the company falls—likely in line with an annual or recurring 409A assessment. Employees realize their shares are now worth a fraction of the value they were just a few months ago. Motivation and engagement slump. Talent gets restive. The best and brightest minds in the organization move to competitors. Future growth prospects diminish.

Not surprisingly, many private sector leaders are trying to get out ahead of that downward cycle. Our conversations with Board members, PE and VC investors and other key stakeholders suggests concerns are growing in those circles, too. And we are fielding more and more calls from private market leaders looking for solutions and ideas.

“We are hearing from a lot of private company leaders who have seen their company valuations drop over the past few months are now wondering how this will impact their employee compensation. It’s a growing concern. And they have a number of options for dealing with the problem. But each of them comes with their own risks.” – Shivani Sopory, Audit Partner, KPMG Private Enterprise

Future trends: Industries to watch

Once the IPO window starts to re-open, what sectors and companies will get the warmest reception?

Nothing in today’s world is certain. But our conversations with investors suggests a leaning towards B2B models that drive automation, improve efficiency and reduce friction. On the consumer side, fintech firms offering not just convenience but also cost savings should also see stronger appetite amongst investors.

“Given the current market and consumer sentiment, investors will be focusing on companies that have the ability to offer a high level of experience at a lower cost than traditional approaches. But they will also need to be able to show how they will turn that solution into real profitability.” – Conor Moore, National Leader, KPMG Private Enterprise

Future trends: Outlook for 4Q 22

The forecast for the final quarter of the year is not looking positive. As many pundits anticipated, 2022 is likely to go down in the record books as one of the worst IPO years in decades. The hope is that a slew of ‘better’ news at the end of the quarter will point to a market reopening. But there are also a basket of big concerns hovering on the horizon.

The optimists among us see a pick-up in S-1 filings and SEC updates towards the end of the year bolstered by lower-than-expected interest rate rises and continued strength in the economy. The pessimists expect the IPO markets to stay boarded up through the holiday season…perhaps longer. We hope the optimists win.