📈I’m often Sceptical about IPOs (and their Timing) – here’s why You Should be too!

When a company wants to raise cash to grow their ambitious plans, they have 2 options: they can either raise debt or equity. The main plus of equity is that the biz has zero obligations like it does with debt, via ongoing interest payments. Sure, companies definitely wanna provide their shareholders with good returns (and eventually dividends!) but with equity they get to do this minus the hassle that debt brings.

For private companies, one option of getting their hands on capital via equity is through an initial public offering, IPO for short. This is where a company raises capital by issuing shares on the primary market. These shares will then become available to trade on the secondary (stock) market we know and love. 

Show me the money! 

You know what they say, one person’s sell is another’s buy. When it comes to the stock market this can’t be farther from the truth. When you buy, another is selling. You can’t both be right! The seller believes the stock price will fall and the buyer that the price will rise. When it comes to IPOs, this is magnified by 10X. Companies raising equity will not be doing it when the price of equity is cheap. 

Quite the opposite in fact. When stock markets are booming (not like they were last year, obvs) more and more companies will want to go public to raise capital at a higher val. 

IPOs also allow founders (and their VCs) to cash in their chips. After all, everyone wants to see that hard cash. And they wanna get the most bang for their buck which just so happens to be when the bulls (not bears) are in town.

And 2021 was the perfect time to do just that! Stock markets were on-fire. Company valuations (aka their price tag) was going through the roof. Companies that were of a certain stage decided to jump on the bandwagon and offload their (pricey) shares to the public – us retail investors! In the first 3 months of 2021 as many as 395 companies went IPO, raising a total of $140bn! During 2021, there were 1,073 IPOs scooping a whopper $317bn.

The state of the economy and IPOs go hand-in-hand

You don’t need me to tell you that our economy is in a pretty sorry state of affairs at the minute!

Interest rates have been hiked to their highest level since ‘08 while inflation is the highest it’s been in 40 years so it’s no wonder that these 2 factors are making it 100X less appealing for companies to raise equity via and IPO since they can no longer fetch an over-the-odds price tag ($$$) for their biz.

Markets have trended downward for the entire 2022 and no founder is about to put their baby up for sale in such sloppy markets. 

My experience as a private shareholder

Back in 2019, I invested into a fintech company. Similar to Robinhood minus the options trading! Anyway, this biz is ~6 years old and in 2020-21 they had no issue tapping investors for capital who were practically yelling “TAKE MY MONEY!!”.

But as we all know this bubble kinda started popping somewhere in 2021. In 2022 it failed to secure investment at a higher valuation so it raised via debt financing. Now, had the momentum in the pandemic for all things tech kept going, I wouldn’t be surprised if they went public in 2 or 3 years. But with the carnage going on in public markets, they (and others) are going to remain public for a lot longer.

The ones that did go public during that hype are in the red and their investors (if they’re still holding!) are nursing big losses.

Here’s a bunch of tech companies that went public in 2021 and their returns since then:

-Affirm down 92%
-Poshmark down 78%
-Bumble down 72%
-Robinhood down 77% 

All this means that with a sluggish economy and sour sentiment for stocks more and more companies will remain private. If they choose to go public now, they’ll get rubbish (but normal!) price tags. 

It also means that these kinds of fast-growing companies are going to be loads more vulnerable from takeovers. This is definitely the case here in the UK; American buyers are flush with cash since just being an American has netted them a 20% gain! 

It’s clear that the IPO fever has gone. It’s dead outside. But the re-birth will be stunning. 

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment