IPO update: Can dealmaking rebound?

Key takeaways

• IPOs were crushed in 2022.
• IPO activity has shown some signs of picking up thus far this year.
• Some high-profile IPOs that could happen this year include Stripe, Instacart, and TikTok.

Initial public offerings had their best year in 2021 since the dot.com era, but dealmaking collapsed in 2022. Will it rebound this year? There are some signs that IPO activity has picked up thus far this year. Here's what's happening among IPOs, plus a look at some of the biggest names that may go public this year.

IPOs crash and burn

After 397 IPOs were completed in 2021, resulting in $142 billion in proceeds, just 71 IPOs closed last year for a paltry $7.7 billion in proceeds (see US IPO activity chart).

The stock market lost 20% last year, and recent IPOs performed even worse. The Renaissance IPO Index, which tracks the performance of newly public companies, fell 57% in 2022.¹

Considering the relatively higher risks associated with newly public companies (that are typically focused on growth), they fell out of favor as investors shifted from growth to defense amid the stock market carnage last year. And tech stocks, which typically account for a significant percentage of IPOs, were among the worst-performing sectors in 2022. That helped limit the desire for new tech IPOs to come to market.

Perhaps the biggest factor curbing IPO activity was rapidly rising interest rates having substantially raised the cost of borrowing that helps finance deals. Rates have continued to push higher this year, which may continue to hinder IPO activity. Add in competition for investment capital from existing SPACs, many of which sprung up during the blockbuster 2021, and you had an environment that made for an extraordinarily difficult year for IPOs.

While there wasn't much activity, the biggest IPOs last year were financial services company Corebridge (), private equity firm TPG (), advanced driver assistance company Mobileye (), and eye health products firm Bausch & Lomb ().

As the IPO market attempts to rebound, there are some factors that may point to a better year for IPOs in 2023. First, markets have gotten off to a positive start, and IPO performance has broadly improved: The Renaissance Capital IPO ETF () has surged 25% year to date. Also, many economists expect the Fed to slow its pace of rate hikes. 

Some well-known companies that could go public this year include several that postponed last year. Among them: fintech firm Stripe, grocery delivery service Instacart, enterprise software company Databricks, message board operator Reddit, video game developer Epic Games, short-form video platform TikTok, and Vietnamese automaker VinFast.

Proceed with caution

Is investing in IPOs right for you? Of course, it depends on your investing objectives and risk tolerance. With that said, if you have an interest in IPOs, you should proceed with extreme caution.

IPOs can generate buzz among investors, particularly for so-called "hot issues" that garner a lot of interest. But beware of getting caught up in the hype. IPO investing can be complex and may be suitable only for experienced investors.

There are unique considerations to keep in mind when it comes to investing in IPOs. For example, the stock of an IPO can be particularly unpredictable on its first day—and also in the first few months—of trading.

There is also the issue of access to IPOs. For individuals, getting shares of an IPO at the stated initial offering price may be hard, since the majority of the shares are typically acquired in large blocks in advance by institutional investors. As a result, the closing price after the first day of trading may be a more accurate price that individual investors may be able to get shares.

Moreover, extracting long-term value out of IPOs, even successful ones, can be tricky for a retail investor. For example, suppose you identify an IPO that you find attractive as a long-term investment, and the price at which it begins trading on the IPO date is $20 (which is by no means a given). If you were to buy the shares at around this price, and by the end of the IPO day the stock price had risen to $30, you might think this is a winning trade.

But take a step back. This means that the company and its underwriters (a financial group, typically a bank that is responsible for determining the market price of an IPO) underestimated demand for the company's stock. Therefore, the company lost out on the opportunity to raise more money to grow its business, because the IPO was mispriced (i.e., instead of receiving, let's say, $30 a share from the public, it will have received only $20 a share). In this scenario, if you were looking for short-term profits, great. If you are a long-term investor, however, a mispriced IPO may not be in your best interest.

Like any other investment, before making a decision regarding an IPO, you should review your investment goals and conduct a thorough analysis of the company, along with its growth prospects. Beyond the idiosyncratic risks associated with an individual investment opportunity, there are distinctive risks associated with IPO investing: Each IPO is unique, and it needs to be evaluated independently to determine its investment potential.

One of the primary difficulties that some investors face when it comes to researching companies that have not yet become public is the extent to which there is access to information. Publicly traded companies in the US, for example, are required by the Securities and Exchange Commission (SEC) to disseminate financial information quarterly. Private companies are not required to do the same (although they do have SEC-mandated disclosure requirements that must be made available to prospective investors in advance of an IPO, a key source of information for an IPO investor being the prospectus).

Perhaps more importantly, individual investors may not have the time or skill needed to evaluate all of the available financial data and to consider the implications to future operating results of the transition from a private to a public company. Consequently, for those investors who do not have access or the skill to analyze all of the financial information necessary to build an informed view of a potential IPO opportunity, it may be hard to fully assess the company's merits as a sound investment.

One way that you might be able to navigate the intricate IPO waters is to consider a managed fund. Most investment management companies have the research capabilities and resources needed to conduct this analysis, which many individual investors are not able to do. And, as always, it is important to build a diversified portfolio, given that one of the risks of IPOs is the stock-specific risk that is present in any concentrated, individual investment.