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The writer is a former investment banker and author of ‘Power Failure: The Rise and Fall of an American Icon’
With the Nasdaq up more than a third so far this year and other equity markets performing well too, it’s no surprise that ravenous investment bankers are busy resurrecting the moribund market for initial public offerings.
IPOs are, of course, a bellwether of sorts for the health of the equity capital markets. The degree to which investors are willing to take risks on the first equity offering of a company has long been considered a litmus test of market sentiment.
IPOs are also usually lucrative for bankers, with underwriting fees of as much as 7 per cent of the money raised, although these are negotiable and bigger deals usually get done for less.
Still, the incentives for Wall Street bankers to underwrite — and then to hype up — IPOs are as robust as ever. “The new issue market is running better than it was in 2022, although we’re a long, long way from where we used to be,” explains Michael Wise, the vice chairman of equity capital markets at JPMorgan Chase.
The problem is that, according to Wise, many of the IPOs done in 2021 and 2022 are trading below their IPO prices. That makes institutional investors furious and discourages them from buying new issues unless they are priced favourably and are from companies with established track records. “It’s a slow healing process,” he says.
Wall Street has been only too happy to accommodate the demands of burnt investors and has been proceeding gingerly — with big carve-outs from established public companies, such as Volkswagen, AIG, GE, and Johnson & Johnson.
Last September brought the partial listing of Porsche, from VW, at a $72bn valuation. At around the same time, AIG completed the minority stake IPO of Corebridge Financial, an annuity company, at a valuation of about $13.5bn. Then, in January, as part of its plan to break itself up into three pieces and then to disappear as a conglomerate, GE spun-off 80.1 per cent of its healthcare division as GE HealthCare Technologies, Inc. The spin-off is valued at about $34bn these days — and its stock is up 30 per cent so far this year.
Even though a few months ago, in April, the company’s stock was 19 per cent higher, few investors are complaining. And the underwriters, led by most of the big five Wall Street banks, all had a good tale to tell investors about how the markets, in early 2023, were starting to shake off the 2022 doldrums.
Next up was the carve-out IPO of Kenvue, the consumer branded business of J&J (think Band-Aids). Kenvue, underwritten by Goldman Sachs, JPMorgan Chase and Bank of America, hit the public markets in May, at a valuation of $41bn. Three months later, the company is worth $45bn, up about 10 per cent since the IPO.
Wall Street is revving up the IPO factory. Cava, the Mediterranean dining chain, went public in June, at a listing price of $22; since then, the stock is up 134 per cent.
Then came the IPO of Oddity Tech, the much-hyped Israeli beauty products and wellness company. With the help of underwriters Goldman Sachs, Morgan Stanley and Allen & Co, Oddity Tech flew off the shelves. Priced at $35 a share, a month or so later the stock is trading at about $50 a share, with a market value close to $3bn. That proved to be an important deal for the equity markets. “If you’re not stretching the boundaries, and if you’re at scale and you’re making money, you can successfully IPO,” Wise tells me.
This IPO enthusiasm is expected to continue into the autumn. “Animal spirits are coming out right now,” says another senior Wall Street capital markets banker. “No doubt about it.” Birkenstock, the shoe company, is gearing up for a September IPO of at least $1.5bn. Arm, SoftBank’s chipmaking company, is hoping for one of at least $5bn in September, too.
But not all who file IPOs are making it to the public markets. The digital marketing company, Aleph Group — which counts Meta, Microsoft and Spotify as customers — withdrew its estimated $300mn IPO in July, claiming its decision was about the “public interest and the protection of investors”.
In the end, as with so many facets of Wall Street, the new issue market is a confidence game. Confidence is built slowly by underwriting established companies and pricing them reasonably. The successes of Cava and Oddity Tech, which were profitable and not priced too crazily, help to restore investor faith and to encourage a little more risk-taking.
But the question always becomes whether investors can keep in balance their greed and their fear of missing out. They couldn’t during the last boom cycle. It’ll be interesting to see if they can restrain themselves this time around.