Arm Holdings Ltd.’s highly anticipated IPO has sparked hopes that the moribund market for new listings will spring back to life. Not so fast, says a cohort of Wall Street pros.
(Bloomberg) — Arm Holdings Ltd.’s highly anticipated IPO has sparked hopes that the moribund market for new listings will spring back to life. Not so fast, says a cohort of Wall Street pros.
All the problems that have waylaid the market for initial public offerings over the past 18 months — from an aggressive Federal Reserve to the threat of a global recession — remain in place, they say. Arm is different than other IPO wannabes that would raise a fraction that its reportedly seeking. For one, it’s massive in comparison, with $2.68 billion in sales and $524 million in net income last year. More importantly, it toils in the white-hot market for artificial intelligence.
For other IPO hopefuls, a successful debut by Softbank Group Corp.-backed Arm would be one sign that investors are open to new issuance again. Other hurdles remain, though. The recent runup in Treasury yields has rekindled worries that the long-predicted credit crunch will materialize and grind economic activity to a halt. August’s stock market drawdown has led to calls to be selective, targeting companies with strong balance sheets — not exactly a calling card of late-stage startups.
“If Arm goes well — and I certainly hope it does — I just don’t think it’ll create a euphoria that all of the others will benefit from,” said David DiPietro, head of private equity at T. Rowe Price. “That sentiment is more driven by the overall market backdrop, and as the market retraces ground there’s a bit more caution than we felt a month or so ago.”
Just $14.4 billion has been raised through IPOs on US exchanges this year with corporate carveouts, consumer-facing firms and SPACs accounting for the bulk of new issuance. Arm’s entry would boost that with a figure at the high end of the range that’s reminiscent of blockbuster debuts like Meta Platforms Inc., which accounted for a large portion of money raised in a relatively tame 2012.
Arm had been aiming to raise $8 billion to $10 billion, but that target could be trimmed back since SoftBank decided to hold onto more of the company. Still, it’s expected to be the year’s largest IPO, potentially opening the door for companies that have been waiting in the wings. Online grocery-delivery firm Instacart Inc., marketing and data automation provider Klaviyo and footwear maker Birkenstock are among those Wall Street expects may follow Arm in filing to go public.
Read more: Arm Listing Set to Be Turning Point for IPO Market, SoftBank
But these bigger names are better positioned to shake off lurking uncertainties. Concerns surrounding a recession and how that could impact different sectors and businesses will keep companies in what Mike Bellin, PricewaterhouseCoopers LLP IPO services leader, calls “the heart of the IPO market” — companies raising $200 million to $400 million — focused on the end of this year or into next year.
“The vast majority of the IPO market does not fit in the same bucket as some of the companies that may launch their processes in the coming weeks,” he said by phone. “They’re going to be watching them closely, if they trade well that’ll help support their process and timeline, but most of those will be later in 2023 or in 2024.”
Overall, potential issuers face investors, burned by offerings that still trade in the red, looking for steep discounts to recent funding rounds.
A survey from KKR & Co. Inc. showed 43% of buyside investors with more than $10 trillion in assets were looking for IPO candidates to provide a 20% to 30% discount to their listed peers to feel comfortable about investing. That’s on top of the fact that the class of 2020 and 2021 IPOs are still sharply in the red — the Renaissance IPO ETF has tumbled nearly 60% from a February 2021 peak.
–With assistance from Michael Hytha.
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