Don't Expect Rebound in IPO Activity Anytime Soon - Goldman

September 28, 2022 9:10 AM EDT
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Goldman Sachs strategist Ryan Hammond commented that the Initial Public Offerings (IPO) market looks “frozen” in 2022. According to Goldman’s data, only 32 companies went public via IPO this year for $2.5 billion.

This marks a plunge of 88% from last year when 259 new companies were launched.

“The jump in the cost of capital has reduced the valuation of all companies, public and private. But the impact has been particularly severe for fast-growing firms that typically comprise a significant share of annual IPO volume,” Hammond explained in a client note.

Goldman’s study of almost 4,500 IPOs completed in 25 years has led them to believe that “investors should focus on firms generating rapid sales growth during the first three years rather than prioritizing immediate profitability, but that a path to profitability eventually matters.”

Hammond also noted that IPOs completed in the last few years “have performed particularly poorly.”

“The median IPO since 1995 underperformed the Russell 3000 index by 19 pp during its first 12 months as a publicly traded company. In contrast, the median IPO since the start of 2020 has lagged the Russell 3000 by a staggering 46 pp over its first year as a publicly-traded company.”

More importantly, Hammond also discussed when the IPO activity could pick up again. Goldman strategists believe it is “still too early to expect a meaningful uptick in IPOs in the near term,” given record-low confidence.

“The murky outlook means a wider-than-usual distribution of potential outcomes that is likely to constrain IPO activity in the near term,” the strategist added.

On a more positive note, public market valuations are still fairly elevated - despite the YTD selloff - which is supportive of IPOs.

“Above-average valuations suggest private companies may still find attractive public market valuations relative to history, but a return to peak 2021 valuations appears unlikely without a sharp decline in interest rates,” Hammond concluded.

By Senad Karaahmetovic

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