Interest rates

Rising interest rates could bring IPO market back to earth after record 2021

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After a record year for IPOs in 2021, the pipeline for 2022 is already filling up. Carillon, Instacart, Reddit and Bandaged These are just a few of the hugely valuable startups that could finally move from private to public. TPG is set to get the party started next week, with a public debut that could value the private equity firm at nearly $ 10 billion.

The big names will be there. But what about the rest of the IPO landscape? Will the good times keep rolling and will other records keep falling? Or will escalating inflation and the potential for rising interest rates lead to a bearish turn?

I spoke this week with Rachel Gerringwho works as the leader of IPOs for the Americas at EYto take the market temperature at the start of a new year.

There were nearly 400 IPOs in the United States last year that combined to raise more than $ 142 billion in revenue, according to data from IPO watchers at Renaissance Capital. Both of these numbers easily exceed any other year since the dot-com boom. Gerring and other experts highlighted several factors that helped create such fertile ground for beginners. Between a flood of government stimulus spending, soaring public valuations, a corporate backlog from 2020, low interest rates and optimism about vaccine deployments, the past 12 months have been almost a storm. perfect.

For the coming year, however, the forecast looks a bit different.

“I’m starting to see headwinds,” Gerring said.

As a major example, Gerring pointed to the growing likelihood that the Federal Reserve will increase interest rates In the coming months. Part of the overwhelming success of the public market in 2021 is because investors are looking for better returns than they might find in the fixed income markets. If higher rates make these fixed income investments a little more attractive, it could undermine some of the juice in the public market.

The pandemic continues, but at this point it appears the stimulus funding tap has been closed for good. Plans to return to the office were once again delayed by the omicron variant, perhaps sparking further pessimism. Many companies struggle to retain top talent. Add it all up and Gerring thinks public valuations are unlikely to continue to climb to ever higher levels in the months to come.

Last year it looked like the IPO window never closed. This year, timing may be of the essence.

“Companies really need to keep planning, because they need to seek out and be able to respond to the right market openings when the times are right for them,” Gerring said. “So for me that continues to put pressure and focus on planning and planning ahead. Because I think in 22, as we’re sitting here today, there’s a lot of uncertainty. ”

The tech and healthcare sectors have been particular hot spots for IPO activity last year. Gerring believes that will remain the case in the months to come. Indeed, three of the four public offerings that took place in the United States in the past week were for healthcare companies. The EY leader said she is also keeping a close eye on the industrial sector, where a new infrastructure bill could lead to an influx of spending, and the travel and leisure industries, which could see another uptick in spending. interest when the omicron variant starts to wear off.

Nowadays, when you talk about IPOs, you can’t just talk about IPOs. The market for PSPC agreements has shrunk considerably from the peak reached around the same time last year. But it remains a major exit option, with nearly 200 blank check mergers completed last year, according to the SPAC Research website.

“You know, the first quarter of 2021 was out of this world,” Gerring said of the PSPC market. “We’re not going to see numbers like that, but they’re certainly not going to go away either.”

It’s easy to think of PSPC transactions as real alternatives to IPOs. In a sense, this is correct. But in another, not so much. As the last year progressed, it became clear that blank check mergers were better suited to certain types of businesses – ones that were more promises of a game-changing future than n ‘ any existing balance sheet. We’re talking about electric vehicle makers, rocket launch specialists, upstart crypto exchanges, the kinds of companies that don’t have a solid financial history that IPO investors tend to prefer.

“This is an area where we spend a lot of time discussing the differences with businesses,” Gerring said. “There are multiple avenues of access to public procurement. What is the best path for each business? I’m not saying one is better than the other. It’s more around, what better way to accomplish the objectives of the company and its group of owners? ”

For most of the biggest names – the Reddits and Instacarts and TPGs of the world – the goal is still an IPO. Some of these companies have been planning their public debuts for several years now, fueled by the hustle and bustle of the past year, only to finally take the plunge. Will they still be able to register if the market starts to decline? It is impossible to predict with much certainty. But Gerring believes that a more bullish IPO environment will have a bigger effect on small businesses. Regarding the reception of the market, some companies have the possibility of creating their own weather forecast.

“Are they affected by any of these headwinds? Yes. To the same degree? Maybe not, ”Gerring said. “We have always thought that there would be these market openings, these market windows that offer a more optimal time. But for companies that are well prepared and very thoughtful in their approach to their IPO or IPO, I think there will always be a market. ”

How friendly will this market be in 2022? TPG’s IPO slated for the coming days should offer our first real look.