The Great IPO Drought has gone on for 18 months, but some are hopeful that may be ending. On Thursday, fast-casual Mediterranean restaurant Cava is scheduled to go public at the NYSE. It’s the first sizable restaurant play to go public since 2021. It was seeking to sell 14.4 million shares at $17-$19, but Monday morning raising its proposed price range to $19 to $20 a share from $17 to $19. At the midpoint of $19.50 that’s a raise of $280.8 million. In the old days (pre-Covid), this would have been viewed as a mid-size deal. It still is a mid-sized deal, but it’s getting more attention than usual because there is some hopes the Great IPO Drought may have a shot at ending. Most important factor for IPOs: state of the market That’s because the most important precursor for a return of IPOs is the market, and that is starting to materialize with the S & P 500 near a 52-week high. “A market rise is a necessary precursor for a rebound in IPOs,” Matt Kennedy, senior IPO market strategist for Renaissance Capital, told me. Another factor helping: Interest rates have been stabilizing for the last month (generally, lower interest rates are better for IPOs). “Any sign that the Fed is done raising rates would be a positive,” Santosh Rao, head of research at Manhattan Venture Partners, told me recently. Still another factor giving cheer to investors, Kennedy said: “Investors are making money in IPOs again.” Kennedy would know: Renaissance Capital runs the Renaissance Capital IPO ETF, a basket of recent IPOs. 2022 was a disastrous year for former IPOs: That ETF fell more than 50% as major holdings like Snowflake, Palantir, and DoorDash got clobbered. However, the “soft landing” scenario that is dominating the market in 2023 has been a big help to the former crop of IPOs. The IPO ETF is up 25% this year, far outpacing the S & P 500. Recent IPOs have been few and far between. However the largest this year, Kenvue, the Johnson & Johnson spinoff, went public in early May and is up 14% since then. It’s a long slog back to a ‘normal’ IPO market As bad as it has been in 2023, it’s better than it was in 2022. That year, a measly $7.7 billion was raised, a pittance compared to the 10-year average of $55 billion. At the halfway point this year, about the same amount has been raised as all of last year. IPOs: The great drought Raised in 2023 YTD: $7.3 billion 2022: $7.7 billion 10-year average: $55 billion Source: Renaissance Capital There’s a long list of companies waiting to go public The hope now is that the rise in the market will cause many companies that have put their IPOs on pause to reconsider. There is a long, long list of potential IPO candidates after Cava, including fellow restaurant chain Fogo de Chao, which filed to go public in November 2021 and still has not gone public. Recently, Panera Bread also said it was preparing an IPO. Several companies have filed to go public confidentially (the filing is not public), including Reddit, Instacart, and British semiconductor giant ARM, which would likely be the largest IPO of the year, with a potential valuation of $30 billion-$40 billion or more. IPO hopefuls that have not filed but expressed interest in an IPO include Stripe, Impossible Foods, Fanatics, Flipkart, Databricks, StubHub, Saks Fifth Avenue E-commerce, and Klarna. Could this be the start of the Great IPO Thaw? Rao is hopeful, calling it “an incremental step forward.” “I don’t think there will be an immediate rebound, but I think there is a good chance of a slow build” into the second half of 2023, Kennedy said. It all depends on the state of the market. Kennedy notes that because of the higher stock market, issuers are also able to go consider going public at potentially higher valuations than before. That, he says, is the ultimate enticement.
