Last year, every company from salad restaurants to sneaker stores were pitching themselves as fast-growing tech companies in the hope of a warmer reception from public markets. This year even software firms have been trying to make themselves look more like a 169-year-old eyecare company.
Market volatility encouraged by slowing growth, rising interest rates and war in Ukraine has brought an abrupt end to last year’s record-breaking listings market. About $4bn has been raised in traditional US initial public offerings this year, according to Dealogic, compared with more than $56bn in the same period in 2021. Shares in companies that went public last year have declined an average of more than 40 per cent from their listing prices.
When the market does begin to thaw, the landscape that emerges is likely to look very different. Bankers and lawyers who spent the past two years touting cash-burning start-ups have spent the past few weeks enthusiastically talking about less flashy sectors such as industrials and raw materials.
Rachel Gerring, head of EY’s Americas IPOs practice, said investors will be looking for “larger companies, those with more certain results and growth plans, profitable companies . . . those are stronger organisations for this type of environment”.
Bausch & Lomb, the eyecare company that raised $630mn this week, appeared to fit the bill perfectly. The company reported $3.8bn in revenues last year and net income of almost $200mn, though profits will fall as it inherits some debt as part of the separation from its parent company, Bausch Health.
It does not get much more “established” than a company that can brag in its IPO prospectus about making sunglasses for American GIs during the second world war, but even Bausch & Lomb had a rough ride. Although it did become the first company to raise more than $500mn since January, the IPO priced below its target range at $18 per share, and remained below the previously planned $21 to $24 range despite climbing when public trading began on Friday.
Planning to price a deal the day after a highly anticipated Federal Reserve meeting did not help matters — Wall Street’s benchmark S&P 500 index sank 3.5 per cent on Thursday, which would make things difficult for any IPO. Insiders insist there is still a healthy pipeline of companies keen to go public when conditions improve, but Bausch’s experience will be a stark reminder to any other prospective candidates that they will have to work extra hard to win over investors.
Byron Lichtenstein, a managing director at venture capital firm Insight Partners, who helps the firm’s portfolio companies prepare to go public, said start-ups have received the message.
In the past, many companies focused on revenue growth at all costs, assuming that practical matters such as profits will work themselves out if a company can reach sufficient scale. Now, Lichtenstein said companies are doing more to at least show how they will become sustainable, even if they are not there yet.
“Companies that go public now will be trying to articulate more efficiency metrics than they normally would to show a path to profitability,” Lichtenstein said.
Such a trend would be welcomed by those who thought valuations had become unmoored from reality over the past two years, but it would be a bold forecaster who predicts the complete end of the start-up boom.
In 2019, a swath of high-profile companies including Uber, Lyft and Peloton suffered disappointing starts to life as public companies. By the time WeWork, the office rental business that had pitched itself as a “state of consciousness”, pulled a planned listing that September, experts were declaring the end of “irrational exuberance” in the market.
But although there was a temporary slowdown, within 18 months IPOs were back at record volumes, a boom in special purpose acquisition companies was in full swing, and even WeWork was on its way back to public markets.
The difference this time could be the same factor that helped make Bausch’s ride so bumpy: the Fed’s plans to keep raising interest rates. The central bank this week lifted rates 0.5 percentage points for the first time since 2000, and it is expected to do the same at its next two meetings.
While volatility linked to the war in Ukraine will hopefully be temporary, higher rates have a longer-term bearing on valuations by reducing the relative value that investors place on companies’ future earnings.
“Paying today for growth way out in the future is all well and good when the opportunity cost is low, but if you can make money in cash, then it doesn’t make as much sense,” said Savita Subramanian, quantitative strategist at Bank of America.
“Now there are other ways to make money. The yield on bonds and different asset classes has dramatically changed over a very short period of time, so stocks where you are ‘buying the dream’ are no longer as attractive if you can make real returns on shorter duration instruments like cash or commodities or [inflation-protected bonds].”