The Nasdaq with Bumble celebrating its IPO. At the big board, it's a Korean e-commerce giant, Coupang, as David said, celebrating its IPO. Rivian electric vehicle maker, of course, celebrating its IPO. Ringing the bell.
The IPO market has all but shut down in 2022
238 days without a tech IPO above $50 million as of today
We're actually framing 2022 as the year in which the IPO market went from boom to bust.
Investors are not looking to invest in the riskiest asset class right now. They are de-risking their portfolios.
It's kind of unrealistic to assume that after last year's record setting pace, things would continue at that same pace. But the collapse has been remarkable.
The single driving factor... the most important one in terms of whether it's an active IPO year or not is the strength of the overall stock market. When stocks are going up, when the indexes are making new records, it means that the public is excited about stocks. Valuations are going up. That means private companies want to capture those higher valuations by selling stock to the public. All those things reinforce one another on the way up. On the way down, it's quite the opposite.
We're roughly nine months in to 2022. It's been the slowest start in over 13 years around IPOs. We've got just over 70 traditional IPOs completed, 70 SPAC IPOs, a combined $16 billion in proceeds raised. So a really remarkable slowdown in the markets.
The Fed has become aggressive in raising interest rates, one of the most aggressive rate hiking campaigns in generations.
My colleagues and I are strongly committed to bringing inflation back down to our 2% goal. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses.
And it also hit the stock market at a time when it was very concentrated in large tech and growth companies, where you have a lot of high expectations for future earnings.
The companies that we're seeing go public so far in 22, the numbers are still largely driven off the sectors that that we would expect. Tech and life science are really still continuing to drive the volume. What we're seeing, though, is an increase in just the microcap IPOs. So microcap being proceeds raise of less than 50 million. 80% of the IPOs so far to date have really been microcap IPOs.
While IPOs raised a record amount in 2021, so did the private markets. And tech unicorns especially are sitting on massive war chests, and that's allowed them to just wait out the storm in 2022.
An IPO is the company's first and probably best opportunity to assemble a following on Wall Street, to assemble a shareholder base, to kind of tell your story in a very focused way. And then if it performs well, clearly you have somewhat of the loyalties of the street. You can pay your employees more. You can attract more employees. So it does feed general kind of corporate objectives, aside from just getting the money from investors.
Companies that IPO'd in 2021, their performance has not been well.
If you look at the Renaissance IPO ETF, that's underperformed broader stock market indices year to date. Looking at last year's IPO class 2021, only one in six IPOs are now trading above issue.
Investors are really risk averse at this moment, and that's what's really impacting the lack of activity that we're seeing. They're looking for companies that are focused more on growth and profitability as opposed to the growth at all costs that we were seeing in 2021.
The tech boom last year was largely driven by the very high valuations that public and private markets were giving to high growth companies, where the price to sales ratio for a lot of these rapidly growing young companies was much higher than historical norms. And a lot of companies took the opportunity to tap public markets.
SPACs are special purpose acquisition companies which are created by a sponsor where the sponsor then takes a cut of the action and then takes the SPAC public and raises cash in that IPO. But the cash is put in an escrow account in a trust fund and the SPAC sponsor then has a period of time, typically 18 months or two years, in which to come up with a merger with an operating company and a private operating company. And in the process, if the merger occurs, that private operating company then becomes a publicly traded operating company.
Now, SPACs have been a pretty terrible performer as a group. In part that's just because people lost interest and want to wait around for a deal to happen. But also it's by definition a lot of these deals that were going to be done were from companies that themselves may not have been the best candidates to just go public on their own.
SPACs have actually been around since the mid 2000s, but they really did explode in popularity in 2020. There were a few high profile successes, specifically DraftKings and Virgin Galactic. Beyond that, I think people viewed them as sort of an equalizer, especially retail traders who saw that they could buy the stock for $10, the same as the institutional investors.
If you're doing a formal IPO, you can't actually issue projections saying how your earnings are going to grow or your profits are going to grow in a very specific way. Whereas for SPACs it was a loophole because part of a merger you can do that. And so this idea was you could just tell a very, very aggressive story and and some people bought into it. And now that's been cooled a little bit.
There are hundreds and hundreds of SPACs that are already public that are looking for a merger partner. So it makes no sense for a SPAC to be going public now rather than wait for a year until all this competition goes away.
We've definitely seen organizations that were really gearing up in 21, targeting 22, anticipating that continued momentum and hit the pause button. That interest of going public is still there. It's how they're using this time to be ready.
I would expect that a low level of activity is going to be continuing, at least for a while. But if the stock market starts going back up again, then we'll see a rebound in IPO activity, although probably not to the levels of 2021.
My guess is the initial wave of IPOs, if and when they come back, are going to be some combination of companies with growing cash flows already, with earnings that might be in things like energy.
The remainder of 22 could be a challenge. And I see companies really looking ahead to the first half of 23 in hopes that we're going to have some stabilization around volatility, market volatility, as well as valuations.