The Resurgence of IPOs: Unlocking Opportunities in the Stock Market
Introduction
The stock market has been experiencing a remarkable surge, with the Nasdaq rising by more than a third since the beginning of the year. This upward trend has reignited the market for initial public offerings (IPOs), beckoning the attention of eager investment bankers. IPOs serve as a litmus test for market sentiment and act as a barometer for the health of equity capital markets. Amidst the fervor, it is crucial to examine the incentives driving Wall Street bankers’ underwriting and promotion of IPOs. By delving into the recent trends and challenges surrounding IPOs, we can gain a deeper understanding of this dynamic market.
The Lucrative World of IPOs
IPOs have long been a lucrative endeavor for investment bankers, with initial fees reaching up to 7% of the capital raised. However, these fees are negotiable, and larger deals typically close for a lower percentage. It comes as no surprise that Wall Street bankers are enticed by the financial rewards that come from underwriting and promoting IPOs. Michael Wise, Vice President of Equity Capital Markets at JPMorgan Chase, highlights how the new issue market has outperformed expectations, even in comparison to pre-pandemic levels. This resurgence of IPOs has reignited the interest of investors and bankers alike, offering tantalizing opportunities to capitalize on market sentiment.
Challenges and Healing Processes
Despite the enthusiasm surrounding IPOs, challenges persist in the market. According to Wise, many IPOs conducted in 2021 and 2022 are currently trading below their listing prices. This poses a dilemma for institutional investors and dampens their appetite for new offerings unless they are reasonably priced and come from companies with established track records. The healing process for the market is slow, as investors seek reassurance and stability in their investment decisions. In response to the concerns of burnt-out investors, Wall Street has accommodated their demands, engaging in cautious IPOs by offering large cuts from established public companies such as Volkswagen, AIG, GE, and Johnson & Johnson.
A notable example is the partial flotation of Porsche by Volkswagen in September, which was valued at a staggering $72 billion. Likewise, AIG completed the minority stake IPO of Corebridge Financial, an annuity firm, at a valuation of approximately $13.5 billion. These instances demonstrate Wall Street’s willingness to adapt and provide investors with enticing opportunities. The recent spinoff of GE’s healthcare division as GE HealthCare Technologies, Inc., valued at around $34 billion, further illustrates the market’s resilience and potential.
Examining Recent Success Stories
Despite the challenges, several recent IPOs have captured market attention and generated substantial returns for investors. Kenvue, the consumer brand business of Johnson & Johnson, went public in May with a valuation of $41 billion. Just three months later, the company’s value has surged to $45 billion, translating to a 10% increase since its IPO. As Wall Street revs up the IPO factory, success stories like Kenvue demonstrate the market’s potential for substantial growth and profitability.
Another shining example is Oddity Tech, an Israeli beauty and wellness company that intrigued investors and analysts alike. Underwritten by Goldman Sachs, Morgan Stanley, and Allen & Co, Oddity Tech generated significant buzz and market interest. Priced at $35 a share during its IPO, the stock is now trading at approximately $50 per share, boasting a market value close to $3 billion. This remarkable success story sheds light on the importance of innovation and differentiation in assuring IPO success, as highlighted by Michael Wise.
The Resilience of IPOs: Future Prospects
The IPO excitement is expected to continue into the fall, with prominent companies preparing for their public debut. Birkenstock, the renowned footwear company, is gearing up for a highly anticipated IPO in September, with a valuation expected to exceed $1.5 billion. Additionally, Arm, the chip maker owned by SoftBank, hopes to make a splash with a projected IPO of at least $5 billion in the same month. These forthcoming IPOs signify the market’s resilience and the growing confidence of companies in capitalizing on favorable market conditions.
However, not all IPO filings make it to public markets. Aleph Group, a digital marketing firm with prestigious clients such as Meta, Microsoft, and Spotify, pulled out of its estimated $300 million IPO in July, citing concerns about “public interest and investor protection.” This serves as a reminder that the new issue market requires trust, built slowly through the underwriting of established companies and sensible valuation practices.
The Balancing Act of Greed and FOMO
Investors find themselves at a crucial crossroads, navigating the delicate balance between greed and the fear of missing out (FOMO). During the previous boom cycle, investors struggled to strike this balance effectively. As we witness the resurgence of IPOs, this critical balancing act holds newfound significance. The successes of IPOs like Cava and Oddity Tech, which have provided profitability without exorbitant pricing, serve as milestones in restoring investor confidence and encouraging a healthier appetite for risk.
It remains to be seen whether investors can maintain their composure and discernment amidst the excitement of the current IPO boom. Learning from past experiences, it is crucial for investors to look beyond short-term gains and carefully evaluate the long-term prospects and intrinsic value of IPO opportunities.
Conclusion
The resurgence of IPOs has brought forth a wave of opportunities in the stock market. As the Nasdaq continues to climb and other stock markets thrive, it is no surprise that investment bankers are resurrecting the once-moribund IPO market. However, challenges persist, and the healing process for IPOs remains slow but steady. Examining recent success stories and upcoming IPOs offers valuable insights into the market’s resilience and potential. The delicate balancing act between greed and FOMO requires careful consideration from investors to make informed decisions as they delve into the world of IPOs. By staying vigilant, investors can unlock significant opportunities and position themselves for long-term success in the dynamic landscape of IPOs.
Summary
Despite the challenges posed by IPOs trading below their listing prices, the IPO market is experiencing a resurgence. Recent success stories such as Kenvue and Oddity Tech demonstrate the potential for substantial returns in the stock market. Wall Street’s active engagement in IPOs signals its capacity to adapt and provide enticing opportunities. Companies like Birkenstock and Arm are preparing for highly anticipated IPOs, further propelling the market’s momentum. However, investors must strike a delicate balance between greed and FOMO, considering the long-term prospects and intrinsic value of IPO opportunities. By remaining vigilant and discerning, investors can unlock substantial opportunities and position themselves for long-term success in this dynamic landscape.
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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 stock markets also doing well, it’s no surprise that ravenous investment bankers are busy resurrecting the moribund market for initial public offerings.
IPOs are, of course, something of a wake-up call for the health of equity capital markets. The degree to which investors are willing to take risks on a company’s first stock offering has long been considered a litmus test of market sentiment.
IPOs are also generally lucrative for bankers, with initial fees of up to 7% of the money raised, although they are negotiable and larger deals usually close for less.
However, the incentives for Wall Street bankers to underwrite – and then promote – IPOs are stronger than ever. “The new issue market is performing better than it did in 2022, even though we’re a long, long way from where we were before,” explains Michael Wise, vice president 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. This infuriates institutional investors and discourages them from buying new issues unless they are favorably priced and come from companies with an established track record. “It’s a slow healing process,” he says.
Wall Street has been only too happy to accommodate the demands of burned-out investors and has treaded cautiously, with large cuts from established public companies, such as Volkswagen, AIG, GE, and Johnson & Johnson.
Last September it brought about the partial flotation of Porsche, by VW, at a valuation of $72 billion. Around the same time, AIG completed the minority stake IPO of Corebridge Financial, an annuity firm, at a valuation of approximately $13.5 billion. Then, in January, as part of its plan to split into three parts and then disappear as a conglomerate, GE spun off 80.1 percent of its healthcare division as GE HealthCare Technologies, Inc. The spinoff is valued at about $ 34 billion these days – and its shares are up 30% so far this year.
Even though the company’s shares were up 19% in April a few months ago, few investors are complaining. And the underwriters, led by most of Wall Street’s big five banks, all had a good story to tell investors about how markets, as 2023 began, were starting to shake off the 2022 doldrums.
Next was the IPO of Kenvue, J&J’s consumer brand business (think Band-Aids). Kenvue, underwritten by Goldman Sachs, JPMorgan Chase and Bank of America, hit public markets in May, with a valuation of $41 billion. Three months later, the company is worth $45 billion, up about 10% since its IPO.
Wall Street is revving up the IPO factory. Cava, the Mediterranean restaurant chain, went public in June, at a listing price of $22; since then, the stock is up 134%.
Then came the IPO of Oddity Tech, the much-hyped Israeli beauty 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, about a month later the stock is trading at around $50 a share, with a market value close to $3 billion. This proved to be a major deal for the stock markets. “If you’re not pushing boundaries, and if you’re large-scale and making money, you can IPO successfully,” Wise tells me.
This IPO excitement is expected to continue into the fall. “The animal spirits are coming out right now,” says another senior Wall Street capital markets banker. “No doubt about it.” Birkenstock, the footwear company, is preparing for a September IPO of at least $1.5 billion. Arm, the chip maker of SoftBank, is also hoping for one of at least $5 billion in September.
But not all IPO filings are making it to public markets. Digital marketing firm, Aleph Group, which counts Meta, Microsoft and Spotify as clients, pulled out of its estimated $300 million IPO in July, claiming its decision was about “public interest and investor protection” .
Ultimately, as with so many facets of Wall Street, the new issue market is a game of trust. Trust is built slowly by underwriting established companies and valuing them sensibly. The successes of Cava and Oddity Tech, which have been profitable and not too insanely priced, help restore investor confidence and encourage a little more risk-taking.
But the question always becomes whether investors can balance their greed and their fear of missing out. They couldn’t during the last boom cycle. It will be interesting to see if they can hold their own this time.
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