Lethal mix of inflation and interest rates cause value of IPOs to nosedive by staggering 90 per cent
Businesses have endured challenging times recently, largely caused by external world events. Because of this, investor appetite has decreased for IPOs.
In fact, rising inflation and interest rates have caused the value of initial public offerings in the US and Europe to fall by a staggering 90 per cent this year.
Despite these obstacles 157 companies have continued with their plans to go public, raising a total of $17.9bn in the first five months of 2022 – compared to $192bn in the same time period last year.
Moreover, there are several major IPOs in preparation that could be completed by the end of the year, including GlaxoSmithKline, AIG and Volkswagen planning a €20bn partial float of Porsche this year.
These significant offerings have the ability to cause the IPO market to bounce-back and provide encouraging opportunities for investors.
Interest rates have risen for the third time in six months in the UK as the Bank of England tries to soften the impact of the rise in the cost of living.
The Bank of England cited the increase to 1 per cent as a result of the cost of living and strong employment as the predominant reasons for the latest rate rise.
The rise has affected the IPO market greatly – last year there were 1035 IPOs worldwide, which represented a new record.
Global IPO proceeds gained a record $608bn as IPO activity surged and valuations were pushed higher by strong investor appetite for equity.
However, the rising interest rates have severely dented that appetite, having a significant impact on the amount of IPOs this year and significantly hinder companies’ plans.
For a lot of the biggest names, an IPO remains the main objective, with some major companies, including Reddit and TPG planning their public debuts for several years now, but it’s hard to predict if they will proceed with their listings if worldwide markets continue to fade.
Chris Biggs, a partner at Theta Global Advisors, explained to City PM today that “rising interest rates have caused a significant shift in the IPO market. Moves must now be made to counter growing inflation and the recent rise is a significant step.”
Companies are finding it harder than ever to retain top talent, adding to the full move back to the office being delayed further by the omicron variant, companies are facing a myriad of obstacles to overcome before considering an IPO.
Biggs explained to City PM today that “global inflationary pressures will grow considerably over the next few months, whilst growth in economies that are energy importers is likely to slow.”
Nevertheless, Biggs did add that whilst the IPO market does not sit in a perfect position, opportunities still exist for companies who are in a prime position to take advantage of them.
“With major companies continuing with their public offering plans throughout the next quarter, the market looks set to rebound and provide several exciting opportunities for investors throughout the rest of 2022.