Bankers and investors are embracing a degree of optimism for the IPO market following a slew of major market debuts in September that made for one of the busiest months since the start of 2022.
So far this year there have been $423 billion worth of equity capital markets transactions, a 5% increase from the same period last year, according to Dealogic data, though this total remains a far cry from the record levels of 2021.
The performance of a spate of high-profile IPOs is being closely watched as an indicator of investors' appetite for new issues.
In the last four weeks, at least 25 companies in the United States and Europe have joined the stock market, raising hopes that a recovery may be in sight after a lengthy drought in fresh listings.
"We're definitely seeing a bit of a soft open in the IPO market", said Lizzie Reed, global head of the ECM syndicate desk at Goldman Sachs. "The last cohort of IPOs ... provided a case study for issuers who might be contemplating markets access."
British chip designer Arm Holdings, marketing automation firm Klaviyo and grocery delivery app Instacart raised more than $6 billion combined in their September debuts in New York, accounting for over a fifth of total proceeds raised by IPOs in the U.S. and Europe this year.
All three companies priced their IPOs at the top end, or above, their indicated price range, highlighting support from investors.
But while shares rallied on their first day of trading, they have since retreated. Arm and Instacart shares briefly fell below their issue price, suggesting there is still some way before the IPO market fully recovers.
"We're still in a rebuild mode for the market more than an absolute bull market," said Robert Stowe, head of Americas ECM at Barclays. "But we are starting to see more engagement (in IPOs) from both sides."
Bankers are not expecting a deluge of deals to rush to market as a result of the recent issues.
"It's encouraging to see deals being priced, but it will continue to be a gradual re-opening of the market rather than the floodgates opening," said Suneel Hargunani, co-head of ECM at Citigroup for Europe, the Middle East and Africa (EMEA).
In the last month, technology has been the dominant sector for new issues in the U.S., but the full quarter has offered a more varied IPO class.
Medical glass producer Schott Pharma debuted on the Frankfurt Stock Exchange on Thursday, with shares closing 16% above the IPO price. In July, German hydrogen firm ThyssenKrupp Nucera and Romanian energy producer Hidrolectrica went public in their home countries.
IPO candidates on both sides of the Atlantic share a common characteristic - they are either already profitable or show a clear path to profitability.
Arm, Instacart and Klaviyo were all profitable at the time of their listings. Klaviyo's shares are now trading at a 21% premium to their IPO price.
"The success of (the) Klaviyo (IPO) is a strong affirmation of profitable growth being a path towards a rewarding valuation by the public markets," said Ross Devor, partner at Thoma Bravo, a software-focused private equity firm.
“Most of the companies in the pipeline, if they're not profitable, they have a definitive path to profitability.” said Samir A. Gandhi, a capital markets lawyer at Sidley Austin.
Notably, some of this year's most emblematic IPOs have attracted cornerstone investors as a way to reduce risk and ensure stable ownership.
"For companies that are market leaders in their sector and have a long-term thematic element, we find that investors are more likely to consider a cornerstone investment," said Stephane Gruffat, co-head of ECM in EMEA at Deutsche Bank.
That was the case of Arm, a leader in chip technology, which saw an array of clients including Nvidia and Apple snap up shares, and Schott Pharma, which attracted the Qatar Investment Authority, as it pushes into the growing market for injectable drugs.
A narrowing gap between buyers' and sellers' views in valuation has also paved the way for more IPOs to come to market.
Instacart agreed to sell shares to investors at a $9.9 billion valuation in its IPO, a fraction of the $39 billion it fetched in a private fundraising round in March 2021 amid a pandemic-induced boom for online grocery deliveries.
For its part, SoftBank bought the 25% it did not already own in Arm at a $64 billion valuation in August to then sell shares at a lower price a month later. "For the IPO market to open more broadly in the first quarter in 2024 ... we need the 2023 IPO cohort to continue to perform well," said Josh Weismer, head of U.S. ECM, Mizuho Americas. "And the market needs a bit more clarity from the Fed."
(Reporting by Echo Wang in New York and Pablo Mayo Cerqueiro in London; Editing by Anousha Sakoui and David Holmes)