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ANALYSIS: Bears Claw IPOs in 2022; New Rules for Direct Listings

Jan. 5, 2023, 5:45 PM

Traditional and SPAC IPOs endured a dismal year in 2022, but a look back at past bear markets reveals that it was a fairly typical pullback. New rules for direct listings on US exchanges should make them more competitive with traditional IPOs going forward, placing traditional IPOs under additional pressure. Uncertainty about when the Federal Reserve will stop increasing interest rates and continuing competition for listings from China’s exchanges, combined with a strong pipeline of companies in China ready to go public and the movement by Chinese companies to delist in the US, further dims prospects for a quick market rebound.

IPOs Were Mostly No-Go in 2022

High inflation, an illness born out of pandemic scarcity; fiscal largesse; the effects of war in Ukraine; and the medicine of interest rate hikes administered by central banks around the world, drove a high-flying IPO market to ground last year. The market recorded 219 IPOs (down 80% from 2021) raising a little over $24 billion (down 93% from 2021) in 2022, including SPAC IPOs, compared to 1,090 deals raising nearly $339 billion in 2021.

For traditional IPOs only, those 2022 figures drop to 133 IPOs (down 72% from 2021), with a total of $10.9 billion raised (down 93.8% from 2021). Only two IPOs (Corebridge Financial and TPG) each exceeded $1 billion raised, though Intel’s Mobileye Global fell just short, raising $990 million. The average deal value notably fell 64.5%, from $310 million in 2021 to $110 million. The top SPAC IPO, Screaming Eagle Acquisition, raised $750 million.

It may be helpful to compare recent results to recessions and other boom times.

IPOs have been in a bear market since December 2021, and recent trends are comparable to what was seen during the economic recessions of 1990–1991, 2001, and the Great Recession (2008–2009).

The market notched 99 IPOs ($7.3 billion raised) in 1990, 101 in 2001 ($46.5 billion raised), 60 in 2008 ($31.3 billion raised), and 80 in 2009 ($21.9 billion raised). Last year compares favorably against those years by deal count, and exceeds the capital raised in all recession years since 1990 but for 2001 and 2008.

The Covid-19 stock listing boom, highlighted in yellow on both charts above, represents an exceptional time for the IPO market, particularly in 2021, when IPOs broke many longstanding records. The unusual confluence of events and policies that drove that bull market are unlikely to be repeated in the near future.

SPAC IPOs Returned to Pre-Pandemic Levels

The SPAC IPO market—although also enduring a winter for deals owing to tough market conditions and stringent new regulations being considered by the SEC—surprisingly performed somewhat better than traditional IPOs.

The deal count for SPACs conducting an initial public offering fell 86%, from 614 last year to 86 in 2022. Total capital raised by SPACs in IPOs dropped even more, plummeting almost 92% to $13.4 billion. However, $13.4 billion raised on 86 IPOs is on par with the last full pre-pandemic year of 2019, which saw 59 IPOs raise $13.6 billion.

Since 2014, the SPAC IPO market has on average raised $33.6 billion a year, though that figure is greatly skewed upward by 2021’s $162.4 billion raised. The median over those nine years is $10.7 billion, which 2022 bests by $2.9 billion, or 27.1%.

But the ongoing surge in SPAC liquidations may continue to dampen SPAC IPO demand in 2023. As of mid-December, a record 58 deals had been called off and, based on Bloomberg data and current spending rates, there are more than 85 de-SPACs that will have insufficient cash to make it through 2023.

Direct Listings Become More Competitive

The popularity of direct listings has been curtailed by a listing rule limiting a company’s capital raise to the range stated on its registration statement. That limitation has proved too restricting, increasing the risk of the offering failing, particularly because direct listings lack an underwriting syndicate to create a market for a company’s shares. Underwriters provide support to initial offerings, which sometimes proves essential to an offering’s success; direct listings cost less to complete than traditional IPOs by not utilizing underwriters.

Nasdaq received approval in December from the SEC for its proposal to ease its direct listing rules. The SEC is expected to bless a similar request by the NYSE soon. The new rule should make choosing a direct listing relatively more appealing to companies looking to issue primary shares and not to simply register existing shareholder shares in their initial public listing. The revised rule eliminates the registration statement’s offering range restriction. It may entice companies to embrace direct listings’ lower cost and the higher share prices realized by selling shareholders when shares go public via a direct listing, thereby adding to the competition felt by other means of going public.

Bloomberg Law subscribers can find related content on our In Focus: Special Purpose Acquisition Companies (SPACs) page, our Equity Deal Analytics page, and on our Securities Practice Center resource.

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