IPO Market Showing Signs of Life, Drawing Second-Half Optimism on Wall Street
Q2 2023 marked the seventh consecutive quarter of lower year-on-year IPO activity, according to Wall Street Horizon data. The April through June stretch was the weakest global go-public count since early 2016. Capital markets continue to run dry as borrowing rates keep rising, and the regional banking turmoil last March didn’t do investment bankers and ambitious young private firms any favors. There are reasons for the bulls to hope, though, and we have already spotted a revival in the world of M&A.
As the second half progresses, a kick-up in IPOs care of the AI boom and a dash of social proof, may lead to some more new ventures testing the secondary market waters. That will be a key theme to watch in the months ahead, but the bears can counter with the real threat of a global growth slowdown looming now through early 2024, though recent domestic economic and earnings data has been stout. Let’s dive into some recent firms going public and what may be in store.
Figure 1: An IPO Freeze-Out Since Q2 2022
Source: Wall Street Horizon
Cautious Capital Markets
It has been about two and a half years since the peak of bubbliciousness on Wall Street. Early 2021 featured hot startups and speculative SPACs taking in huge sums of investor cash, then enjoying strong initial equity returns. Hedge funds that targeted those niches and were nimble enough to pounce on a short-lived burst of capital market activity benefited.
Many economists and market strategists predicted the euphoria would not last, but strong IPO activity persisted throughout 2021, and even into the first several weeks of last year. Over the last 18 months, though, it has been a rare sight to witness an NYSE specialist orchestrate a successful trading open for a fresh IPO company. Is that trend changing? Our team asserts it’s possible based on the latest clues. A diverse set of new public listings has stirred up a positive tone on Wall Street, and more IPO activity may come over the next several months.
A handful of new companies garnered positive financial media coverage in the last few months including consumer health company Kenvue (KVUE), Mediterranean restaurant firm CAVA Group (CAVA), second-hand merchandise retailer Savers Value Village (SVV), private equity-based energy firm Kodiak Gas Services (KGS), and reinsurance company Fidelis Insurance (FIHL).
Figure 2: A Handful of 2023 IPO Winners: Kenvue, Kodiak, CAVA, Super Value Village
Source: Stockcharts.com
What To Watch For
Looking ahead, the IPO market is not expected to see a flurry of new public listings in the coming weeks. Historically, the back half of Q3 tends to be light on IPO activity. There is optimism, however, that the final few months of the year will bring about a pickup in equity offerings. While it may not be a floodgates scenario, the increased number of firms testing the secondary market waters is a minor hopeful sign.
Hedge Fund Impacts
Private capital must pay close attention to what’s happening in the IPO market right now. Think of it like a key sentiment gauge – the more firms go public, the more asset managers may want to position for a risk-on trading environment. Gauging investor appetite is crucial across hedge fund strategies.
We also suggest that tech-focused funds stay particularly abreast of the global IPO market as the second half presses on. Our research suggests that the Information Technology and Communication Services sectors could be particularly active in the coming quarters. Hedge fund analyst teams should conduct their due diligence, and the ideas mentioned here can serve as valuable starting points.
Now, let's turn to one of the largest hedge fund strategies: global macro. Funds and partnerships that rely on a robust global economy might face limited opportunities in the near term. However, a pickup in capital market activity could present nascent trading chances, and funds should remain vigilant for such opportunities.
Event-driven hedge funds can also glean insights from IPO trends. A pickup in equity offerings in the final four months of the year could be a potential event that triggers market movements and new intermarket correlations.
One more thing: We’ll be watching what happens in China. There are emerging signs that the regulatory clampdown on companies domiciled in that nation may be loosening. Could we see a few prominent Chinese companies test the IPO waters? We will leave that ball in the court of hedge fund experts for now.
The Bottom Line
The IPO market is part art, part science. Up-and-coming companies, and even some established firms, want to be sure there is ample demand for their shares before committing their stock to the secondary markets. Private equity, meanwhile, is always looking for green shoots to signal that their investments pay off, and investment bankers are always champing at the bit to underwrite quality deals. As the IPO situation turns modestly more sanguine after a dearth of activity, investors and hedge funds should keep on top of the latest key events among newly listed companies.
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Christine Short is VP of Research at Wall Street Horizon
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