The U.S. initial public offering market was bound to cool off after two sensational years, including 1,015 new offerings in 2021. But it’s now in the doldrums after a period when technology stocks fell into a bear market.
“There’s an inverse correlation between market volatility and IPO activity,” said John Tuttle, vice chairman of Intercontinental Exchange’s
NYSE Group, where he oversees the global listing business.
In an interview from the World Economic Forum last week in Davos, Switzerland, he said when the VIX stock market volatility index
is 20 or below, indicating a stable environment, companies are more likely to want to go public. Right now, however, the VIX is above 27.
He said there’s three major factors overhanging the market. First, the Fed’s interest rate-hike cycle and the questions on size, timing and frequency of rate hikes. Then there’s the geopolitical issues that have had a major impact on supply chains and inflation. And the final factor is a shift in investor sentiment from focusing on growth and revenue to a focus on profitability and cash flow.
Tuttle said there’s still plenty of companies who are prepared to go public once conditions settle. “I suspect the most likely scenario is you’ll see a post-Labor Day launch of IPOs, with pricing later in the month,” he said. “There is a backlog of companies that had been prepared to go out, and then market conditions became a bit more choppy.” For now, spinoffs of public companies may still test the market. American International Group
for instance, has filed to sell a majority of its life and retirement business, an IPO it hopes to complete in the second quarter.
Tuttle said he’s not willing to proclaim the death of the SPAC market now that the Securities and Exchange Commission has started to clamp down on them, even as he expects deal activity to return to historic levels. “There could be companies where they believe having an alignment with a sponsor can bring strategic benefit to the company, whether it be from their experience, network, or even just guidance and governance, that could be helpful to the company as it transitions to become a public company,” he said.
Tuttle made the case that in a volatile environment, listing on the New York Stock Exchange is even more valuable. He cites data showing rival exchanges more than twice as volatile at opening auctions and three times as volatile at closing auctions. (Nasdaq
maintains it has tighter spreads at both the open and close.) “We’ve done this for 230 years,” he said. “How we do it has evolved, but it’s all about aggregating that liquidity, having that accountability and remembering who the market serves, and that’s issuers and investors.”
The big issue at Davos was sustainability. Would the NYSE ever restrict listing based on those criteria? “We take a non-opinion based approach to ESG, in that we provide best practices with regard to reporting, but also we provide data,” he said. Companies can get the data they want to benchmark against their peers, and also measure their own progress.
“When it comes to putting listing standards in place, it is our view that the job of creating policy is the job of policy makers. So the job of operating the most liquid capital markets in the world that provide access to capital and access to opportunity is what we do best.”