The “unicorn phenomenon” formed in private markets is now roiling public markets. Unicorns are “realizing” their billion-dollar-plus valuations through flipping shares among private equity investors. Burgeoning startup ecosystems are facing a reckoning after a record year for IPOs. Almost every loss-making Unicorn that has been listed in the recent past is quoting below its listing price.
The trend of startups is “finally blowing up,” creating a record wave of IPO activity to nab sky-high public market valuations. And this trend isn’t likely to cool down in 2022.
2021 in Review
2021 marked a record-breaking year for IPOs, globally. Equity markets in the U.S. and Europe yielded double-digit returns in 2021, owing to the reopening of the global economy, strong market earnings, and monetary policies. The advancements were experienced despite the rising inflation and geopolitical instability.
In addition to the strong performance of equities, markets were less volatile in 2021, thus offering a less unpredictable backdrop compared to 2020. 2021 was considered the perfect environment for IPO investment. With ample firepower, investors were eager to deploy capital, and market conditions empowered them to do so.
Global IPO markets delivered 2,682 IPOs raising $608bn. In 2021, the largest IPO globally was the $13.7bn IPO of an American electric vehicle automaker. This IPO attracted significant attention and premium valuation.
IPO experienced a record-breaking surge in 2021, and the pipeline for 2022 is already stocking up.
Read more: What Will the Economy Look Like in 2022? 6 Trends to Watch Out For!
Is the IPO bubble about to burst?
The situation is more likely screaming-
I-P-Oh-no!
Tech IPOs experienced a record year in 2021. But the experience is not likely to be the same this year. Here’s why.
- 2020 is likely to be recorded as an annus horribilis for the finance market, except for a handful of technology organizations that reaped the rewards with successful initial public offerings (IPOs).
- According to data by Bloomberg, US companies raised a record $435 billion in stock sales in 2020. Most of these new listings were technology companies.
- Cloud-based software firms like Zoom, Airbnb, Snowflake, Asana, and Palantir performed exceptionally. They continue to see their stock prices flourish.
The question that arises is whether the trend is likely to last this year.
The IPO boom is overlapping with the entry of young first-time investors in the stock market.
As reported by the National Stock Exchange (NSE), 5.13 million investors were added in just four months, from 1st April to 25 July 2021. First-time investors have never experienced a serious market decline. They are more interested and excited about flipping stocks in IPOs. Their immature attitude is evident in the eruption of panic and anger, each time a sudden decline inflicts losses.
The money raised by IPOs has been greater than in any year in the last decade by a large margin. Bloomberg reported that after a record year of initial public offerings of tech startups, the boom time might be coming to an end.
Wondering why?
The reason is the lashing received by the public debuts and stocks tanking soon after listing.
Startups are now postponing their public debuts and reassessing their target valuations, as regulators have increased scrutiny of IPO prospects. The US IPOs of startups Druva Inc, InMobi Pte, and Pine Labs have been postponed to the second half of 2022 or later.
Read more: Top AI Stocks to Watch Out for in 2022
Global IPOs: At a Glance
- 2021 was recorded as the biggest IPO year ever, with $608bn raised globally. The Americas was the dominant region; EMEA saw the highest relative year-on-year growth at 367%, whilst Asia-Pacific growth was modest.
- Global IPO in 2021 proceeds finished at $278bn, higher than 2020 at $608bn. Global IPO surged, and valuations were pushed higher due to the strong investor appetite for equity.
- The Americas contributed 57% of global profits. In EMEA, IPO bounced back with proceeds up to $99bn due to the reopening of the European economies and investor confidence.
- IPO activity in the Asia Pacific was more muted. Some regional headwinds impacted the key markets of Mainland China and Hong Kong.
A host of companies are eying a debut in the IPO market to take advantage of favorable conditions. But given the timing, several industry analysts are worried about the bubble bursting. In the face of the uncertain 2021 environment, the global IPO market enjoyed an exceptional year, breaking records by IPO volume. 2021 experienced a total of 2,388 deals grossing US$453.3b in profits, a 64% and 67% increase YOY, respectively.
Last year, nearly 400 IPOs in the U.S. raised more than $142 billion in proceeds, according to data published by the IPO watchers at Renaissance Capital. With soaring public valuations, the backlog of companies from 2020, low-interest rates, and the optimism of vaccine rollouts, the past year gave rise to a perfect storm.
The Biggest Irony
The companies raising money are juicing the inflation that is now posing as a threat. This IPO boom has been rewarding for sellers but not buyers.
- The Renaissance IPO Index was down 9% this year.
- Some of the most expected offerings flopped hard.
- Robinhood fell nearly 50% from its offering price of $38.
While the big names are sustaining, what about the rest of the IPO landscape?
- Will the good times continue, and more records will continue to plunge?
- Or will the escalating inflation and the rising interest rates cause things to take a turn?
The IPO Hotspots
Tech and healthcare sectors were hotspots for IPO activity last year. The situation is estimated to remain the same in the months to come. The new evolving infrastructure is adding to an influx of spending, thereby leading to a surge of interest in travel and leisure industries and other industrial sectors.
Read more: “Speed, Data…Crypto?”: Fintech Trends to Watch Out for in 2022
2022 Outlook: Broadening of the IPO sector
The IPO sector pipeline is expected to broaden as technology and high-growth equity stories are being tested by investors, reflecting the share price downturn and headwinds of tech stocks.
ESG themed sectors offering alternative energy solutions are also catching the eye of investors. In addition, the increasing regulation around ESG for listed and private companies will continue in 2022. ESG reporting will likely be an important part of value creation in IPOs.
2022: A year of strong economic growth, at a slower pace
The strong global economic growth will continue in 2022 as developed economies have extra capacity, offering a favorable environment for equities. However, the growth will be moderate compared to 2021, given the number of headwinds that emerged in the second half.
In 2021, it seemed like the IPO window would never close, but 2022 is expected to be quieter. This year, timing will be a major element for investors treading, considering the number of disappointing IPO debuts that resulted in ending the year below its issue prices.
With the IPO markets reopening, companies need to resume planning to respond appropriately to the market situations. In 2022, valuation considerations and IPO pricing will be at the forefront for investors and the overall IPO equity.
To Sum Up
A lingering pandemic, choked-up supply of goods, and other economic anxieties projected a gloom over the Equity & IPO market. The market has descended considerably from a peak that occurred last year.
Moving forward, both headwinds and tailwinds are likely to impact the IPO activity. While geopolitical tensions, inflation risks, and new variants of the ongoing COVID-19 pandemic are likely to hamper economic recovery, relatively high valuations, and market liquidity aim to keep the IPO window open in 2022. The record year for IPOs is swinging to an end.
While 2020 encountered a remarkable boom, 2021 brought the same fate for tech stocks, even when the lasting effects of the pandemic continued. Even though 2021 promised an uncertain environment, the global IPO market broke records. The rollout of COVID-19 vaccination programs and rebounding global economies bolstered the optimism.
But the most crucial question now is: In 2022, will the market experience a fateful run?
As the year progresses, it would be interesting to observe how favorable the market will be for IPO in 2022.
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