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IPO investors in the midst of a record 2021 issuance rush have so far been disappointed by dismal returns, and the outlook for the once-booming market is only getting worse with rising rates and falling insider sale going on.
Last year, the number of traditional US IPOs rose to the highest level since the late 1990s and deal value hit a record, according to Dealogic. So far, performance from these public launches has lagged significantly behind their historical averages.
According to Bank of America, 2021 deals fell an average of 14% in the six-month period following the IPO, compared with a historical average of 14%.
Thomas Thornton, managing director at Bank of America, said in a note.
Amid expectations of higher interest rates and a return to volatility, the market quickly turned away from risky, growth-oriented companies, especially affecting small-cap IPOs and small-cap IPOs. companies with a long road to profitability.
Electric pickup truck manufacturer Rivian Automotive is one of the biggest IPOs of 2021 with a market capitalization that briefly tops traditional automakers like Ford and General Motors. However, the stock wiped out all shares after its launch, trading about 12% below its IPO price.
“I think for sure the IPO market will slow down this year” Ulrike Hoffmann-Burchardi, portfolio manager at Tudor Investment Corp. “We’ve seen, particularly in software, perhaps 90% of the tech IPO process, which has now had a strong reset in valuation.”
Tech stocks are considered sensitive to rising yields because rising debt costs can hamper their growth and can make their future cash flows appear less valuable.
“We have to see a stable exchange rate,” said Hoffmann-Burchardi. “When the volatility and interest rate swings are this big, it’s going to be very difficult to price and recalibrate yourself.”
Meanwhile, many of the IPOs conducted in the second half of 2021 will expire within the next six months. The IPO lock-up period is usually 180 days when company insiders are unable to sell their shares.
– CNBC’s Leslie Picker contributed reporting.