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The author, a former investment banker and author of ‘Power Failure: The Rise and Fall of an American Icon’, shares insights on IPOs.
In a year where the Nasdaq has surged by over a third and other equity markets are performing well, investment bankers are eager to revitalize the initial public offerings (IPOs) market.
IPOs serve as an indicator of the equity capital markets’ health. Investors’ willingness to take risks on a company’s first equity offering reflects market sentiment.
Bankers have strong incentives to underwrite and promote IPOs. While underwriting fees can reach up to 7% of the funds raised, these fees are negotiable, and larger deals tend to have lower fees.
However, according to Michael Wise, Vice Chairman of Equity Capital Markets at JPMorgan Chase, many IPOs from 2021 and 2022 are currently trading below their IPO prices. This frustrates institutional investors and deters them from investing in new issues unless they are attractively priced and come from established companies. Wise refers to this as a slow healing process.
Wall Street has accommodated burnt investors by facilitating carve-outs from established public companies such as Volkswagen, AIG, GE, and Johnson & Johnson. These carve-outs have seen success, with notable examples including the partial listing of Porsche from VW and AIG’s minority stake IPO of Corebridge Financial.
Recent successful IPOs include Kenvue, the consumer branded business of J&J, which saw a 10% increase in value since going public, and Cava, the Mediterranean dining chain, which has seen a 134% increase in its stock price.
Oddity Tech, the Israeli beauty products and wellness company, also had a successful IPO with its stock price trading at approximately $50 a share, representing a market value close to $3bn.
The IPO market is expected to continue its momentum into the autumn, with companies like Birkenstock and Arm preparing for IPOs. However, not all companies that file for IPOs are successful in reaching the public markets, as seen with Aleph Group’s withdrawal of its estimated $300mn IPO.
Ultimately, the success of the new issue market relies on building confidence through underwriting established companies and pricing them reasonably. Recent profitable IPOs, like Cava and Oddity Tech, help restore investor faith and encourage risk-taking. However, investors must strike a balance between their greed and fear of missing out.
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