A Rivian R1T electric pickup truck during the company’s IPO outside the Nasdaq MarketSite in New York on Wednesday, November 10, 2021.
Bing Guan | Bloomberg | Getty Images
IPO investors in a record rush to issues in 2021 have so far been disappointed with dismal returns, and the outlook for a once-booming market is only getting worse with rising rates and insider sales on the horizon.
Last year, the number of traditional U.S. IPOs reached the highest levels since the late 1990s and deal values reached record highs, according to Dealogic. So far, the performances of these public debuts have been significantly below their historical average.
2021 trades fell an average of 14% in the six-month post-IPO period, compared to an all-time average of a 14% gain, according to Bank of America.
“The high supply of IPOs, the anticipation of higher fed funds rates, a historically extreme proportion of early-stage/unprofitable companies, and perhaps some investor fatigue in learning so much from new businesses have taken their toll,” Thomas Thornton, chief executive of Bank of America, said in a note.
Amid expectations of higher interest rates and returning volatility, the market quickly moved away from risky, growth-oriented companies, which particularly hurt small-cap IPOs and those with a long track record to profitability.
Electric pickup truck maker Rivian Automotive was one of the biggest IPOs of 2021 with its market cap briefly outpacing traditional automakers like Ford and General Motors. However, the stock wiped out all the post-debut pop, trading around 12% below its IPO price.
“I think there’s no doubt that the IPO market is going to slow down this year,” said Ulrike Hoffmann-Burchardi, portfolio manager at Tudor Investment Corp. “We’ve seen, particularly in software, which is probably 90% of the tech IPO pipeline, now a drastic reset in valuations.”
Tech stocks are considered sensitive to rising yields because the rising cost of debt can hamper their growth and make their future cash flows less valuable.
“We need to see rates stabilize,” Hoffmann-Burchardi said. “When the volatility and movement in interest rates is this large, it will be very difficult for valuations to find themselves and recalibrate.”
Meanwhile, many IPOs made in the second half of 2021 will experience a lock-in expiry over the next six months. An IPO lock-up period is typically 180 days during which insiders of the company cannot sell their shares.
– CNBC’s Leslie Picker contributed reporting.