The dramatic drop in IPOs: From blockbuster to bust

Lynn Martin, the 68th president, has served as the New York Stock Exchange's president for six months.

06 July 2022 Wednesday 14:18
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The dramatic drop in IPOs: From blockbuster to bust

Lynn Martin, the 68th president, has served as the New York Stock Exchange's president for six months. Her tenure coincided with extreme volatility.

It began on a positive note. The Dow Jones Industrial Average and the S&P 500 closed at new heights on Jan. 3. However, since then the indexes have dropped by 20% and 15% respectively.

Wall Street is roiled by inflation at its fastest rate in 40 years and the possibility of a recession.

Martin states, "You know, I see markets as a mirror of the way people feel." "A lot of the time, there's uncertainty and that ends up being expressed in markets.

Stocks have seen sharp declines due to fear and anxiety. It's also freezing out IPOs (or initial public offerings) from private companies, who are afraid of selling their shares to public investors at a time of investor withdrawal.

Martin's stock exchange has seen a decrease of IPOs (or new stocks) by around 80% compared to last year.

This comparison may be unfair, as the markets were hot in 2021 when the U.S. economy emerged after the worst days of the COVID-19 epidemic.

Bank balances grew last year as the government invested stimulus money in the economy. People didn't have enough places to spend so the government increased spending. Millions of people opened stock trading accounts through online brokerages.

Stock market responded by launching record numbers of IPOs.

Rachel Gerring, head of Ernst & Young's Americas IPO Practice, says that it was a "blockbuster year" in 2021. "There was a lot more demand for high-growth companies in tech and healthcare than there was supply."

Today's investors are less optimistic about the prospects of future growth for many companies.

The Federal Reserve will increase interest rates to control inflation. This could cause companies to take less risk, save more cash and invest less in the future.

Martin's main job is to convince private companies that they should list on the New York Stock Exchange. She says that many of them wait for the future of their economy to become clearer and for the sharp selloffs in the first months of the year's to recede.

Martin says that the pipeline is strong. Martin says, "But it's on hold."

It's the exact same story at the Nasdaq. 753 companies became public on the Nasdaq in 2021. Only 108 listings were added in the first half this year.

Jeff Thomas, chief commercial officer at Nasdaq, said that investors have different expectations and are more open to taking on risk. It is difficult to predict how companies will perform and what their future worth will be.

He often questions the CEOs of private companies about how investors will value their businesses when he speaks to them. Thomas says that this calculus has changed.

He says, "Part of our conversations with executives is getting their heads around that they probably won't get the same valuations this fiscal year as the bankers promised last year."

Although share prices fell last year, the value of shares was still very high. According to Ernst & Young, the average share price of companies that went public by 2021 is 42% less than when they first traded, on average.

There are a few other factors that could make 2022 a difficult year for stock exchanges.

Due to a dispute between China and the U.S. over regulatory issues, Chinese companies have not gone public in the U.S. Didi, a ride-sharing company that went public last year, left the New York Stock Exchange in June.

A second fad that has been popular is also fading. SPACs were the way that hundreds of private companies went public in 2020 and 2021. The acronym SPACS stands for special-purpose acquisition corporations and was a quick way for companies to go public. They are subject to less regulatory scrutiny than traditional IPOs. To sell their shares, the companies pair up with shell companies that are already listed on the exchanges.

Thomas says, "Investors were looking to find places to put their money, and SPACs seemed attractive."

However, the money is not as plentiful and 600 SPACs remain on the sidelines. They have no one to pair up with.

This is another indicator of how Wall Street has changed in the past few months.



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