A slate of planned tech IPOs is rejuvenating the moribund market for new listings, but the diminished valuations most of them are expected to fetch show just how skittish public-market investors remain about former high-flying startups.
(Bloomberg) — A slate of planned tech IPOs is rejuvenating the moribund market for new listings, but the diminished valuations most of them are expected to fetch show just how skittish public-market investors remain about former high-flying startups.
While demand appears brisk for the handful of coming IPOs, it is being fueled by sharp discounts to prior values. Instacart, for example, is seeking a valuation more than 75% below the level it last raised cash at in 2021. Klaviyo’s target is some 13% below its last funding round valuation in July 2022, according to data from PitchBook. Even Arm Ltd., the SoftBank Corp.-owned firm with AI ambitions expected to be the year’s biggest listing, is coming out at a valuation some $15 billion below where pundits predicted it would just weeks ago.
The haircuts reflect just how far private companies have fallen since the 2021 tech boom. Back then, investors poured a record $338 billion into US IPOs just in time for the Federal Reserve to turn off the monetary spigot. Shares in most of those companies, like Rivian Automotive Inc. and Coupang Inc., have foundered. The Renaissance IPO ETF plunged 69% from a February 2021 peak to a low late last year.
While AI has resuscitated the market for all things tech, buyside investors aren’t quite ready to assign private companies the same lofty valuations they’ve hung on most of the firms in the Nasdaq 100. A KKR & Co. survey that showed 43% of investors with more than $10 trillion in assets were looking for IPO candidates to provide a 20% to 30% discount to their listed peers to feel comfortable about investing.
Arm is “manufactured” to have a strong opening given its small public float paired with a solidly-covered book and strategic investors, writes Josef Schuster, founder and chief executive officer of IPOX Schuster. “With Instacart specifically, the huge drop from pre-IPO market valuations also underlines the risk in participating in the much-hyped pre-IPO market.”
Investor appetite will be tested this week, with Arm set to price its offering Wednesday and the other two hitting the road to make their pitches.
The lower valuations may also reflect the desire among bankers to be conservative with pricing in order to generate a first-day rally in the shares. That, the thinking goes, could smooth the runway for other potential IPOs, with many market participants agreeing that there’s plenty of cash looking to take stakes in private companies if the pricing is right.
While a conservative listing would be a ding to Instacart shareholders selling into the listing, the first-day pop would leave the remaining shareholders — including many of those reducing their stakes — sitting on big gains themselves.
All three deals use strategies that have helped fuel some of the top-performing newly-public companies so far this year: Line up cornerstone investors to buy a chunk of shares to ease uncertainty and sell a more modest piece of the company to create a tighter pool of shares available to trade. Both tactics were used by Cava Group Inc. and Savers Value Village Inc. which have rallied more than 25% from their IPO prices. The strategy led to Cava nearly doubling in its debut as Savers posted a 27% rally.
Read more: Cornerstone Investors Provide a Boost to This Year’s Top IPOs
The more modest valuation expectations for Instacart and Klaviyo will give bankers the ability to meet investors looking for attractive deal terms, though both could be moved higher based on demand. That appears to be what SoftBank Group Corp.’s Arm is doing. with it said to be considering raising the price range of its deal after the share sale was oversubscribed by 10 times, Bloomberg News reported.
The reception to the deals could open up a window for companies to go public after a dearth of offerings. Just $14.2 billion has been raised via IPO on US exchanges this year, a slide from last year and a 94% plunge from 2021’s record, data compiled by Bloomberg show. Vietnam-based internet startup VNG Ltd. and footwear maker Birkenstock are among the other companies that could push to go public in the coming months.
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