After a record year in 2021, the market for initial public offerings (IPOs) in 2022 was relatively thin. If market volatility remains high in 2023, the IPO market could remain low in 2023, as well.
In 2021, investors in the U.S. outlaid more than $150 billion to grab a piece of the sizzling IPO market. But last year, that figure dropped to a meager $9 billion. In terms of total deal value, that $9 billion represented a 20-year low.
Outside the United States, the situation was much the same, as illustrated in the graphic below.
In 2022, the main headwinds for the IPO market were rising interest rates and elevated volatility in the financial markets. While interest rates may not increase much more from here, much of the damage has already been done.
Benchmark interest rates are currently at a 15-year high in the U.S., and high interest rates can be a form of kryptonite for the IPO market. When rates are rising, fixed-income investments like bonds become relatively more attractive.
In 2021, with interest rates near zero, new bond investments were less attractive, which is likely why the IPO market attracted so much fresh capital. In 2023, bonds will attract new money due to higher absolute rates and from investors and traders trying to play a rebound in the bond market.
According to some measures, the 2022 bond market was one of the worst in history.
For example, in 2022, the Morningstar U.S. Corporate Bond Index marked the worst decline in its 23-year history (-15.75%). With the U.S. Federal Reserve nearing the end of its current rate-hike cycle, there are likely a large group of market participants planning to try and play a rebound in this sector. That could mean less capital for the IPO market in 2023.
Last year, elevated market volatility also contributed to reduced interest in IPOs, because market research has previously demonstrated that when volatility is high, investors and traders tend to be more risk-averse.
This year, it’s extremely difficult to forecast how volatility will impact the IPO market, because future volatility is virtually impossible to predict—atleast with any strong degree of conviction.
In the current high-interest rate environment, volatility would likely need to contract significantly from 2022 levels for the IPO market to regain some of its previous momentum.
As of early January 2023, the CBOE Volatility Index (VIX) is still trading above its long-term average of 19. Should the VIX slide back below 19, and continue into the low teens, that could help catalyze a fresh wave of IPOs.
Should a fresh wave of IPOs materialize, investors and traders may want to keep an eye on the companies listed below, which could IPO at some point in 2023:
- Arm Holdings
- Impossible Foods
- Savers Value Village
To follow everything moving the markets this year—including the latest IPOs to hit the market—monitor tastylive, weekdays from 7 a.m. to 4 p.m. CDT.
Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastylive or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to firstname.lastname@example.org.