Cava’s 141% Rally Spurs IPO Fever That Bankers Worry Is Overdone

Wall Street veteran Doug Adams is trying to temper enthusiasm in the IPO market.

(Bloomberg) — Wall Street veteran Doug Adams is trying to temper enthusiasm in the IPO market.

Yes, there have been some home-run IPOs in the past couple months — Oddity Tech Ltd. is up 50% since its July debut and Cava Group Inc. popped 99% on its first day — and yes, those deals signal a reopening of a market that had been essentially frozen since early last year. But Adams, the co-head of global equity capital markets at Citigroup, wants everyone to be realistic about the boom that will come once the market emerges in September from its typical summer lull.

“We’re going to see more IPOs than we would’ve expected two months ago but we’re not going to see that flood just yet,” Adams said in an interview.

The market has been tepid for good reason. The broader equities rebound has been spurred by Big Tech stocks and excitement over artificial intelligence. The Federal Reserve has been on a historic interest-rate hiking campaign that many had feared would push the US into a recession, though there’s growing confidence that the central bank will hold rates at its current elevated levels and the economy is heading for a soft landing.

“The question boils down to: Is the industry mature enough to see mass IPOs over the next year? And I’m not sure it’s there yet,” Arjun Kapur, managing director of Forecast Labs, a venture group within Comcast Corp. said.

Just $14.1 billion has been raised through initial public offerings on US exchanges this year as of August 7 – a 27% decline from same period last year and a 94% plunge from 2021, according to data compiled by Bloomberg.

“It feels to us that the beginning to middle of 2024 is more likely to be active than the balance of this year, but the pickup in activity will be gradual,” David DiPietro, head of private equity at T. Rowe Price, said.

Read more: Dealmakers Adrift as $1 Trillion Vanishes in First-Half

L Catterton is set to launch an IPO of footwear maker Birkenstock as soon as next month, Bloomberg reported. British chip designer Arm Ltd. and other companies like online grocery service Instacart Inc., car-sharing business Turo Inc., and marketing-automation platform Klaviyo Inc. could also move ahead with listings this year.

“While the IPO market may not be as active, it’s not for a lack of interesting companies in the private market,” said Adams.

Taking Their Time

Investors are still feeling the pain from the collapse of new listings from 2020 and 2021. So instead of following the markets by scooping up new issuances they’re being more disciplined. Money managers are buying shares of companies they see as strong fundamental investments.

That may be the case but some investors have been piling into newly-listed companies like Cava, which surged 141% from its debut two months ago, because the broad market rally has been driven by just a handful of stocks. That means investors that weren’t overweight the likes of Nvidia Corp. and Meta Platforms Inc. — shares of each have more than doubled this year — are likely lagging their investment benchmarks.

“Oftentimes investors have used the new issue market” to play catch up, said Adams. “That’s driving some of the performance of recent IPOs.” 

Read more: Beauty Company Oddity Jumps in Debut After $424 Million IPO

Major stock indexes are trading near 16-month highs and the VIX Index has held below 20 since late March — a key level for bankers seeking a less volatile equity market for pricing stock offerings — meaning traditional fundamentals are in place. 

“The market is ready for this, it’s just that the companies are choosing for one reason or another to take their time,” said DiPietro.

The spread between what a company believes it’s worth and what investors are willing to pay has been among the key hurdles for an IPO market that’s been shut for 18 months. Companies will need to become comfortable with economic stability and an expectation they can deliver on their forecasts, investors and bankers said.

“It’s not a question of whether there is investor demand but if the investor demand is at a price that matches the needs and desires of our corporate client base,” said Keith Canton, head of JPMorgan Chase & Co.’s Americas equity capital markets group.

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