It’s been a lackluster year for IPOs, but the final months of 2023 could see a significant increase in the number of companies going public. Several long-awaited IPOs are expected to take place soon. If received positively by investors, it could signal the start of a more robust IPO market, provided interest rates, inflation and the economy can stay on track.

“This year is on pace to be the quietest pace for IPOs since 2009,” said Brianne Lynch, head of market research at EquityZen, a marketplace for private company stocks. Still, there is a lot of pent-up demand from institutional and private investors who built up capital while the IPO window was closed. “The first IPOs will be a good indicator of investor demand,” she says.

Here are some of the hottest IPOs on investors’ radars and what’s happening in the IPO market.

IPOs should be created after the break

IPOs have been largely on hold since the start of 2022 as rising interest rates, rising commodity prices and high inflation have all but closed the window for companies to go public. Certainly some small companies, such as mutual savings banks, were able to enter the market, but the well-known companies that make investors’ hearts beat faster were largely denied financing.

Not only has the number of deals decreased recently, but the total amount of financing has also decreased. According to Renaissance Capital, for example, there were only 52 IPOs in the first half of 2023, compared to 39 in the same period last year. Total funding for the deal increased slightly in absolute terms, from $4.2 billion to $8.9 billion. But those numbers pale in comparison to the turbulent first half of 2021, when there were 219 IPOs totaling $79.9 billion.

“In the first half of this year, financial markets were the tightest they have been since the financial crisis,” said Daniel Milan, managing partner at Cornerstone Financial Services in Southfield, Michigan. “The capital markets were tense. Period.”

Still, the situation is improving enough to fund some IPOs, especially as inflation calms and investors increasingly believe a recession is no longer a possibility in the near future. The Federal Reserve appears to be on the verge of ending its unprecedented rapid rise in interest rates.

“With interest rates at or near their peak, this is starting to create a level of certainty for companies to enter the IPO market,” says Milan.

But even if the next higher-profile IPOs are successful, private companies won’t have much time to make their offering before the end of the year. A real reopening of the IPO market is likely to be postponed until next year, and only if the sensitive IPO market remains robust, say professionals.

“If these few IPOs are successful, it would encourage others to follow suit,” says Lynch, “but we probably won’t see much activity until 2024.”

Investors should rest assured that plenty of private companies are on the rise, waiting for a more robust market. So-called unicorns – those with a private valuation of more than a billion US dollars – are numerous, says Lynch, and more than 1,200 are currently on the shelf.

But even with an open IPO market, investors are selective about which companies they fund.

Investors are still picky about IPOs

This tight financial situation has led to at least two dynamics in the IPO market. First, in the near future, only the better companies will be able to reach the IPO funding window, unlike 2021 when even suspect and loss-making companies could raise capital. Second, companies go public at valuations that are lower than valuations in private financing rounds.

Regarding this first point, the companies coming to market are the better sort, with strong growth rates or in popular sectors such as artificial intelligence, fintech or enterprise software.

Companies that go public now are profitable because investors in this environment are not interested in companies that lose money, says Lynch. They also look for companies that are still growing revenue by 30 percent or more per year.

The second dynamic is particularly crucial. Ever-higher valuation signals a successful investment, keeps investors happy, and allows venture capital and other private equity firms to present their returns to future clients. Since these private companies fund companies for a typical period of 8 to 12 years, now is the time for some long-awaited IPOs to fly the nest, even if the market is a bit tight and the valuation is not as high as the private companies really are want .

“Many of the companies that go public have to accept valuations that are below what they raised money at in the private market,” Lynch says. “A discount of 10, 15 or 20 percent is probably a win in this environment.”

However, if these IPOs are successful in late 2023, it could ease the taboo on going public at lower-than-private valuations and encourage more companies to do so, albeit at a measured pace.

Investors should proceed with caution when it comes to IPOs

But even if the IPO market continues to open up, investors should approach it with caution. IPOs are notoriously underperforming in the early part of their public life, as they tend to benefit insiders at the expense of outside investors. (Learn how to participate in IPOs here.)

“The people who make money from IPOs, at least in the short term, are the bankers, the IPO shareholders and the select institutional investors who can get the shares before the IPO,” says Milan.

Another dynamic is also at play: Growth-stage companies are staying private longer than ever before, allowing private investors to benefit more from the upside potential than before. This means there is less upside potential for public investors, which are simply an exit strategy for insiders.

“Everyone sees the shiny new property, but it’s not to the advantage of the retail investor,” says Milan.

The better approach for most investors is to give the new IPO at least a few quarters to adjust and for the hype to die down – and with it the stock price. Meanwhile, investors can more fully analyze the new company and make a more informed investment decision.

7 hot IPOs to watch out for

1. Instacart (CART)

This year, Instacart’s long-rumored IPO finally takes place, but unfortunately not at the valuation that investors would otherwise have expected. A funding round in March 2021 valued the grocery app at $39 billion and included top venture capitalists such as Andreesen Horowitz. After cutting its valuation in May and October 2022, the company has settled on an IPO valuation of between $8.6 billion and $9.3 billion – a significant decline from previous estimates. Those looking to participate in an IPO may have an opportunity through SoFi Invest, which acts as an underwriter for the deal and can offer it to members.

2. Arm stocks (ARM)

British chip designer Arm Holdings went public on September 14th, and developments are worth keeping an eye on following its debut. According to early estimates, it could well be the biggest debut of 2023, with a total valuation of $52 billion. Arm is a major player in the chip design market and its work is used by major chipmakers such as Intel, AMD and Nvidia. According to Reuters, a number of major technology companies are also investing in Arm, including Apple, Alphabet and Nvidia.

3. Birkenstocks

Yes, Birkenstock — the shoe maker long known for its appeal to hippies in the U.S. — is poised for an IPO. The German company, revered for its understated sandals, is making its high-profile debut, with some estimates putting its value at a whopping $8 billion. However, other estimates are more modest, putting it at $4.4 billion, according to Barron’s. With sales of around $1.3 billion in fiscal 2022, the lower valuation is closer to the mark.

4. Klaviyo (KVYO)

Klaviyo focuses on data and marketing automation, enabling eCommerce companies to send marketing emails to potential customers. The company has a strategic partnership with Canadian e-commerce giant Shopify, which invested $100 million in the privately held company in August 2022. After the company’s last funding round in 2021, the company was valued at $9.15 billion, according to Reuters. However, the company is targeting a valuation of up to $8.4 billion for the IPO, a significant discount.

5. Data blocks

Databricks is a cloud-based data infrastructure company with a potential market value in the tens of billions – a reduced price of $31 billion in October 2022, down from $38 billion in 2021. However, with a new round of funding, the value could rise to $43 billion, according to a recent Bloomberg report. This round would forestall an IPO, but only increases interest if the company eventually decides to go public. Competitors included recent IPOs Snowflake and Confluent. Databricks has some top investors including Andreesen Horowitz, BlackRock, Tiger Global and Fidelity.

6. Stripes

Stripe is another IPO candidate that has long been discussed, and the e-commerce payment processing company’s founders told employees in January that they would decide within a year whether to pursue an initial public offering or allow insiders to buy shares to sell via a direct listing, according to CNBC. The company was once valued at $95 billion, but a funding round in March brought its valuation to $50 billion, well below internal estimates. The company has notable backers including Andreesen Horowitz, Goldman Sachs, Baillie Gifford and MSD Partners.

7. Reddit

Reddit, the so-called “front page of the Internet,” operates one of the most popular sites for discussions with people who share similar interests and hobbies. The company confidentially filed for an initial public offering with the Securities and Exchange Commission in December 2021, but a lack of profitability could keep the company on the sidelines of going public for now. Labor issues and concerns about AI using their data could also keep investors waiting and waiting. Reddit’s valuation was downgraded by investors from its $10 billion valuation in August 2021.

Bottom line

The IPO market may not be as hot as it was in 2021, but some interesting companies are still likely to hit the market. And a successful debut could lead to an even stronger IPO market, especially if inflation, interest rates and the economy remain stable and welcoming to investors.

Editorial Disclaimer: All investors are advised to conduct their own independent research on investment strategies before making any investment decision. In addition, investors should note that the past performance of an investment product does not guarantee future price increases.

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