Since the Fed decided to raise interest rates in March 2022, the investment banking segment has been hit hard, with M&A transactions declining sharply, a symptom of an economy where uncertainty plays a significant role.
A very weak ECM market
This drop has been particularly significant within the ECM segment, with investment banks advising companies to go public in 2022 and early 2023.
The three obstacles to IPOs
First, the Federal Reserve has raised interest rates, which creates a climate of heightened uncertainty as to whether going public in this scenario is really a smart move, so many companies have decided not to go public and to delay their IPOs until the Fed stops raising interest rates and the uncertainty subsides.
Secondly, in 2022, the US benchmark index and one of the international benchmarks, the S&P 500, returned -18.01%, and the situation in the world of small caps was particularly serious. All this led to a drop in valuation and a significant contraction in the multiples at which companies are trading, making it unattractive to go public in an environment where the valuation of companies is very low compared to previous years and postponing the operation until the course of the economy changes.
And finally, there is little support from investment banks for IPOS in an environment of rising interest rates, and with an economy that is not at its best with constant warnings of recession. The big investment banks such as Goldman Sachs, Morgan Stanley and JP Morgan, seeing a significant drop in their level of sales, a rise in interest rates that greatly reduces their activity and an environment of uncertainty where it is more important than ever to avoid having as much balance sheet risk as possible, have decided not to underwrite many of these operations in the expectation that the market will not react positively and that they could suffer losses in the millions of dollars.
IPO Renaissance
However, we saw a glimmer of hope with the Arm IPO, undoubtedly the IPO of the year which was a success and aroused unprecedented optimism on Wall Street, the AI chip company owned by Softbank closed the day of the IPO with a 25% rise in its stock and with a valuation of $65 billion , undoubtedly a resounding success.
To be able to say that IPOS will be revived at the end of the year and in 2024, we must on the one hand analyze the IPOS market beyond Arm and on the other hand, closely follow the Fed's decisions on monetary policy.
Firstly, if we examine one of the main IPOs that have come out after Arm such as Instacart, we see that it was not as successful, during the first day of trading the Instacart share rose by 12%, however after two days the gains derived from the IPO vanished and since then the fall in price with respect to its share price on the day of the IPO has been very significant, almost 25%. So, we can conclude that it has not resulted in remarkable success but rather in failure, which gives us a symptom that the market is not really in a moment of euphoria where all the companies that go public receive excessively high valuations.
On the other hand, if we want to try to understand when the IPO market will recover, we have to follow closely the Fed's interest rate decisions and it does not seem very good news for the IPO market the Federal Reserve's position to keep interest rates at this level for about another year or so.
Therefore, if we want to critically assess reality and try to predict what will happen to the IPO market in the near future, we will have to follow the Fed's decisions very closely.
"A number of uncertainties, both old and new, complicate" the task of balancing the adjustment in rates, but he assured that "policy tightening will be maintained" until they are confident that inflation is on track to the 2% target.
Written by: Alfonso Egaña
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