IPO activity has continued to drop throughout the second quarter as deal numbers and proceeds plunge.
The U.S. market led the sharpest year-to-year deal decline of 73% so far in 2022 compared to the rest of the world, according to the latest EY Global IPO Trends report.
"I don't know that we've reached the bottom, but we are certainly in a wait-and-see period," Rachel Gerring, EY Americas IPO leader, said on Yahoo Finance Live (video above). "Companies are pausing, taking stocks of just what is happening across the broader market and navigating through the choppy waters of rising interest rates, inflation, and recessionary fears, ongoing geopolitical instability, and supply chain shortages, workforce shortages, high volatility, and then we can't forget the performance of the 2021 IPO class."
The exceptional 2021 IPO year raised a record-breaking $453.3 billion in equity across the globe. The U.S. alone ended the year with $174.6 billion in proceeds. However, the bullish valuation crushed investors with disappointing post-IPO performance as most of the 2021 IPO cohort is trading below their initial offering price.
Waiting on the sidelines
Companies previously looking to go public are facing significant volatility and uncertainty.
IPO analysts see private companies navigating an intricate weave of economic headwinds caused by global recession and inflation, hiking interest rates, and the Russian-Ukraine war. Many of them are turning their focus internally as the current IPO climate trends unfavorably.
Gerring agreed that the lackluster earnings are impacting potential newcomers.
"Companies are taking time to be inward focused, looking and challenging their business, shoring up key functions in that public company readiness arena forecasting abilities and so forth, and waiting it out," she said.
According to the EY report, sectors that typically lead IPO activity have been particularly impacted by market volatility, which has deterred many deals from taking place. And, the report noted, most of 2021's IPOs are trading below price, with average performance "trailing broader market declines."
"Investors are becoming more selective and are refocusing on the companies' fundamentals instead of just 'growth' stories and projections, e.g., sustainable profits and free cash flow," EY London's June 20 press release stated.
Amid the backdrop of uncertainty, IPO investors right now are focused on "a clear path to profitability," Gerring said.
"I see in the last half of this year and into 2023 companies that can convey both growth and profitability as opposed to growth at all costs that we saw in 2021," she said.
Although IPO volumes are expected to remain low for the time being, companies are still preparing to reach the stock exchange one day, according to Gerring.
"Right now, we are focused on just really helping companies evaluate their path to going public, how they would go public, and really that public company readiness, making sure that they are thinking through and prepared for the demands of being public," she said, adding that at the end of the day, "you have to operate like a public company before being public. So we are finding a lot of our clients are taking this time right now really to focus on that."
Rebecca is a reporter for Yahoo Finance.