Initial Public Offering (IPO): a record year for 2021, the backlash in 2022

Initial Public Offerings, or IPOs, are financial operations that consist of taking an unlisted company public. To do so, the company's valuation is converted into shares, the price of which is set by rating agencies. These shares are placed on the stock exchange and their shares become available to everyone: the future shareholders of the company. In most cases, this operation is coupled with a capital increase, which is the purpose of IPOs. 

In recent years, IPOs have been very volatile. Following the sanitary crisis, the year 2021 has seen a considerable increase in IPOs. A sharp counter blow was then observed in the first quarter of 2022. How can we explain this sudden drop in the number of IPOs and their amount in 2022?  

Read more: What is a takeover bid? 

2021 was the year of all records for IPOs

According to the PwC report, the year 2021 saw nearly 2,682 IPOs completed for a total amount of $608 billion. Not surprisingly, the USA accounted for the majority of IPOs (57%). However, it is worth pointing out that the number of IPOs in Europe has more than doubled compared to 2020. 

Read more: What does the PwC report on the future of M&A say? 

But how to explain this trend? First of all, the low volatility of stocks in 2021 has led to a feeling of confidence, which may have encouraged IPOs. Indeed, companies have been preparing their IPO for many months, if not years, and have been waiting for the right moment to trigger the IPO. A market with low volatility is a "safe" market, which encourages the purchase of new shares. Add to this the low interest rates, the situation was favorable for IPOs. 

Note, however, that this varies by sector. The tech sector attracted the most IPOs. This can be seen very concretely, as 100% of the top 10 IPOs of 2021 were tech companies. 

A trend that strongly reverses in the first quarter of 2022

Let's first recall that IPO waves are correlated to investors' confidence in the market at a given time. The year 2022 has very quickly predicted a decline in the performance of financial markets. With the context of uncertainty that set in during the year (inflation, Ukrainian war), a clear slowdown of IPOs was observed. Indeed, the first quarter of 2022 has already seen a 37% drop in the number of IPOs compared to the first quarter of 2021. The same is true for the global amount of fundraising, which has dropped by 51%.

According to the EY report this time, stock price volatility has doubled, indicating high uncertainty in financial markets. This explains the drop in IPOs, as the context was no longer one of confidence. 

What’s the performance of the companies that did their IPO in 2022?

Let's qualify our comments first. Despite a record number of IPOs in 2021, 57% of them have underperformed as of December 31. This means that the share price as of December 31 has fallen relative to its price at the time of the IPO. We can therefore see that investor confidence had already started to decline by the second half of 2021. In particular, we notice a steady trend:

• Companies with a valuation of more than €1 billion at the time of their IPO, the price of their capitalization has increased in 62% of cases
• Companies valued at less than 100 million euros at the time of their IPO have seen their share price increase in only 22% of cases

This can be explained by the fact that large managers (and private equity funds) tend to follow only companies with a large capitalization, since they are more likely to obtain a better return. 

Finally, this phenomenon can be explained by the development of SPACs (Special Purpose Acquisition Companies) which are companies created solely for the purpose of acquiring a company and taking it public. In the first quarter of 2021, SPACs represented 30% of IPOs. Their decrease in capitalization can therefore be explained by the costs generated by the acquisition of the target company and the administrative part generated. This type of financial operation is still quite new and highly speculative, which explains why many investors are still reluctant to practice it. 

Read more: SPACs: definition and explanation of the phenomenon