Market downturn sparks longest U.S. tech IPO drought in more than 20 years

The stock market downturn since the start of the year has led to the longest drought in U.S. tech listings this century, and experts remain cautious about the pace of recovery even after tentative signs of recovery in other sectors.

There will be 238 days without a tech IPO of more than $50 million on Wednesday, surpassing the record set after the 2008 financial crisis and the bursting of the dot-com bubble in the early 2000s, according to research by Morgan Stanley’s technology equity capital markets team.

U.S. stocks have been rocked this year by the Federal Reserve’s move to lower inflation by raising interest rates sharply. Higher interest rates hit stock valuations by reducing the value of future earnings and fueled fears that the economy is headed for a recession.

High-growth tech stocks dominated last year’s record IPO market and made some of the biggest gains during the stock market boom, but they have also been hit disproportionately by this year’s sell-off.

The tech-heavy Nasdaq Composite is down nearly 28% so far this year, while the S&P 500 is down just over 19%, and the revival IPO index, which tracks U.S. companies that have gone public over the past two years, is down more than 10%. 45%.

“There’s a huge amount of uncertainty in the market right now, and uncertainty is the enemy of the IPO market,” said Matt Walsh, head of technology equity capital markets at Silicon Valley Bank Securities.

“I think we need to see the outlook stabilize and investors get back in to buy existing public securities before they are willing to step further out of the risk curve and buy tech IPOs.”

The cautious early reaction to life insurer Corebridge last week completed its first $1 billion U.S. IPO since January, underscoring investors’ wariness of more mature and profitable businesses.

Even after the Corebridge deal closed, overall U.S. IPO volume fell 94% year over year, with just $7 billion raised so far in 2022, compared with $110 billion a year earlier, according to Dealogic.

Corebridge is closely watched as a sign of investor interest in more deals. But Nicole Brookshire, a partner at Davis Polk, a law firm focused on tech listings, said other factors, such as weak earnings reports, could have a “bigger impact” on the outlook for new tech issuers.

“Guidance for some companies and sectors has deteriorated [and] Many companies are feeling the effects of macro headwinds, which impact valuations,” she said.

The IT group in the S&P 500 nearly met its second-quarter earnings forecast, but its forecast for the third quarter has been repeatedly cut, and earnings are now expected to fall 4% year-over-year, according to FactSet.

Many tech groups have responded to the downturn by putting more emphasis on cutting costs and showing progress toward profitability, but Brookhill said it will take time for companies to show that the changes are working.

“There was little talk of profitability last year [among IPO candidates]There’s more now, but the problem with shifting the focus from a growth story to a profit story is that issuers need time to prove their progress. “

A more positive factor in prolonging the drought, SVB’s Walsh added, is that tech companies raised so much private capital before the downturn that “there is not the same sense of urgency.” He said he expected “a small number” of companies to still try to go public this year, but said most had already pushed back their plans to 2023.

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