IPO Rebound to Continue Despite Drops in Arm, Instacart Shares

Markets are shrugging off declines in two of this month’s biggest listings — Arm Holdings Plc and Instacart — leaving the door open to a sustained rebound in IPOs.

(Bloomberg) — Markets are shrugging off declines in two of this month’s biggest listings — Arm Holdings Plc and Instacart — leaving the door open to a sustained rebound in IPOs.

The two companies plus Klaviyo Inc. brought in a combined $6.5 billion, bringing the totaled raised in initial public offering this month to $7.2 billion, according to data compiled by Bloomberg. That represents a steep increase after IPO’s totaled a mere $14.2 billion in the first six months of the year.

“The ultimate success of the IPO is not determined by the trading and closing price of the shares on the first few days following the IPO,” said Frank Rahmani, a partner with Sidley Austin LLP, which handled the Klaviyo offering. “Especially given the market volatility and considering generally smaller public float for emerging growth companies, the success of an IPO is viewed over the following weeks and months.” 

What the three attention-grabbing IPOs did was provide additional points of reference for future issuers and bankers, showing that investors still have an appetite for new listings, as demonstrated by the level of subscriptions for the three stocks. Arms’ $5.3 billion offering was 12 times oversubscribed, Instacart’s $660 million offering was more than 23 times oversubscribed, while Klaviyo’s $576 million deal was nearly 30 times oversubscribed.

That hasn’t stopped Arm shares falling 18% and Instacart dropping 10% from their respective peaks since going public. Klaviyo, in the meantime, has traded steadily above its issue price. 

“The trading outcomes for these IPOs is not what anyone expected, but it has nothing to do with the quality of the order books and the demand that was in place,” said Matthew Wolfe, head of technology & consumer equity capital markets at Piper Sandler. “Everyone feels really encouraged by the receptivity we saw.”

Tipping Back

The new listings market, being the sale of riskier assets, has always been the first to close and the last to re-open during a downturn. IPO volumes, therefore, have drastically lagged behind those of secondary share offerings since the market corrected in late 2021. 

Arm’s mega IPO helped tip that balance back, though the money raised through new listings is still way below the $13.4 billion of secondary share offerings so far this month, Bloomberg data showed. 

The fact that recent IPOs were oversubscribed indicated that quality companies that command a leading position in their industry and with a track record of profitability, or a clear path to it, can still command heavy demand. 

At the same time, a public listing comes in particularly handy at a time when the Federal Reserve may raise interest rates one more time. 

If new listings in 2020 and 2021 aimed to take advantage of market euphoria and the resulting high valuations, IPOs this year are more characterized by being back to basics — tapping the relatively lower cost of financing through equity rather than credit. 

And there are signs companies that fit the best-in-class bill are not being deterred by market jitters. 

L Catterton-backed footwear maker Birkenstock Holding has filed for an IPO, slated for next month, and Rubrik, a cloud and data security startup backed by Microsoft Corp., is on track to start its roadshow in October.

Meanwhile, KKR-backed community-based health-care services provider BrightSpring Health Services Inc., which withdrew its initial public offering plan last year, has confidentially refiled for a listing that could potentially raise $1 billion in the fourth quarter. That would be the first health-care services IPO of the year.

The recent post-IPO declines in share prices reflects possible downside from the conservative approaches to new offerings, rather than a lack of demand. The combination of a small public float and a large chunk of shares sold to mutual funds and asset managers who plan to hold onto the shares for the long-term may explain some of the selloff.

“Long-only investors were given full allocations and did not have a need to buy in the aftermarket to fill out positions,” advisory firm ICR Capital said in a note. “Meanwhile, many remaining investors received allocations that were too small to maintain, and quickly flipped their shares on initial strength which left the stocks to languish in the aftermarket.”

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