ANALYSIS: IPO Winter Shows Early Signs of Thaw

The IPO winter hasn’t ended, but signs of a spring thaw are upon us. Although capital-raising during the second quarter continued a now 18-month run of disappointing results, the success of several recent offerings is giving investors and would-be public companies some much-needed reason for optimism.

Long-Awaited Green Shoots Seen in an Icy Market

A strong debut by fast-casual Washington, D.C.-based restaurant chain Cava Group Inc. is giving hope to companies that have been sitting on the sidelines, waiting for a better market environment before going public. Not only did Cava’s $318 million offering exceed expectations, but its stock shot up 99%. That’s an impressive first-day pop, ranking among the best US debuts of the last two years.

Cava’s success, along with that of thrift store retailer Savers Value Village, which saw its shares rise 27%, ought to encourage more initial public offerings—although not every recent IPO fared as favorably in Q2.

Second-Quarter Results Still Underwhelm…

Overall, the quarter’s results raised the market’s temperature from frigid to tepid.

Compared to the first quarter, the number of IPOs completed declined from 46 to 38 but the value of capital raised more than doubled, from $3.5 billion to $8.5 billion. Year-over-year improvement was a similarly mixed result: The second quarter of 2022 logged 45 IPOs that raised $4.3 billion.

Within the second quarter, month-by-month results show a notable uptick in total IPO deal value in May, with a smaller increase in June. Capital raised in IPOs totaled only $611 million on 15 deals in April but rose to over $6 billion on 11 offerings in May, while $1.9 billion was raised on 12 deals in June.

A look at recent IPO deal counts reveals how sharply the past six quarters contrast with the prior seven quarters that made up an IPO bull market.

That market was fueled principally by the quantitative easing and cheap money of the pandemic and the SPAC-offering boom that followed. As the Federal Reserve moves closer to ending its current program of quantitative tightening, the IPO market should face fewer headwinds.

…But Deals Are Trending Bigger

After the first quarter of this year, I noted that the size of initial public offerings had shrunk considerably since 2020. Such a retrenchment is a strong indicator that the market is under pressure and companies are reticent to go public.

Now that trend has reversed. The offering size of both traditional and SPAC IPOs turned sharply higher in the second quarter.

The first quarter’s average offering size was $74 million for traditional IPOs and $81 million for SPAC IPOs. Those figures rose considerably in the recent quarter, with traditional IPOs more than tripling their average offering size to $234 million and SPACs more than doubling to $173 million.

During bear IPO markets, companies often delay their public debuts or are forced to downsize their planned offerings. This second-quarter surge in offer size for both types of initial public offering bodes well for the future strengthening of market demand for new issues.

Bloomberg Law subscribers can find related content on our In Focus: SEC Rulemaking page, our In Focus: Special Purpose Acquisition Companies (SPACs) page, our Equity Deal Analytics page, and on our Securities Practice Center resource.

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