Investors hoping for summer IPOs could be out of luck. Here’s why.

The US IPO market looks back on another weak week, with just one small deal capping a period of little to no activity as investors eye volatile secondary markets amid high inflation, supply chain difficulties and a raging war in Europe.

According to Bill Smith, co-founder and CEO of , there were just seven IPOs in May, raising a total of $1.1 billion, making it the slowest month for new deals in more than five years capital of the Renaissance, a provider of IPO-focused ETFs and institutional research.

The typical spate of deals that comes after Memorial Day weekend failed to materialize, only with Hong Kong-based online broker Zhong Yang Financial Group TOP,
comes out last week. That deal was at the lower end of its price range, grossing $25 million at a $175 million valuation.

“The big macro hangover is rising interest rates, which is really poison for growth stocks,” Josef Schuster, founder of IPOX Schuster LLC and chief architect of the IPOX indices, told MarketWatch.

“You can see today that the market tried to hold up but then yields went up and that’s the big overhang that needs to be resolved. That won’t happen until the Fed is done taking action.”

Source: Capital of the Renaissance

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The IPO market is also suffering from poor returns stemming from last year’s bumper crop of deals, Shuster said. According to data from Dealogic, more than 1,000 new companies listed shares on US exchanges in 2021 to raise $315 billion.

Many of those deals are now falling through, causing investors to lose money and shy away from new offerings.

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The pre-IPO market, meanwhile, has soaked up billions of dollars that are now bogged down as valuations are questioned amid wealth destruction in the tech sector. (The pre-IPO market allows employees and accredited investors to trade stocks of privately held companies preparing to go public.)

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“10 or 20 or 30 years ago the pre-IPO market didn’t exist, but a lot of investors are now stuck in markets that can’t be valued because the sponsors haven’t been updated,” Schuster said.

Hedge funds are also hitting a wall, he said. Tiger Global Management, for example, is said to have lost more than 50% of its value in 2022 after making big bets on tech names like Snowflake Inc. SNOW,
sea ​​ltd SE,
and Carvana Co. CVNA,
as CNBC reported last week.

A positive sign is that the companies that entered the market in 2022 are doing well, Schuster said. Examples include oilfield services company ProFrac Holding Corp. PFHC,
which is up about 10% since its IPO in early May, and Excelerate Energy Inc. EE,
That’s about 5% up from when it debuted in April.

“There are a number of deals that are getting cheaper and doing well, and that could be a light at the end of the tunnel,” Schuster said. “Founders are more selective and investors are more selective, so things are becoming more rational, which could mark a turnaround later this year.”

One IPO vehicle currently struggling is the Special-Purpose Acquisition Corporation (SPAC) model, which has become very popular during the pandemic. SPACs, also called blank check companies, are shells that get listed on stock exchanges and then have up to two years to acquire a company or companies, which then become public companies.

Last week, Forbes and SeatGeek were forced to abandon SPAC deals, joining a growing list of companies forced to cancel plans.

“It’s just not worth listing if the result is high fees, low funding, low liquidity and reputational damage from poor returns,” Renaissance’s Smith said.

IPOX’s Schuster noted that many SPACs are nearly 2 years old, and if they haven’t closed a deal, they could be forced to liquidate and return the money to investors. The majority of SPACs undercut traditional IPOS, “and are just bad deals,” he said.

Both Goldman Sachs GS,
and Citigroup Inc. C,
recently said they would no longer work on SPAC deals, he said, while Bank of America said it would reduce its involvement. Schuster likened the phenomenon to the dot-com period in 2000, when banks with bulge brackets couldn’t get enough IPO companies for tech startups — until the crash, when they all pulled out.

“Solid companies looking for growth financing will always find that the IPO route is the best,” he said.

This week’s only deal, by Phoenix Motor Inc. PEV,
was downgraded late Tuesday and priced below the midpoint of the range.

As a spin-off from SPI Energy Co. Ltd. the company designs, assembles and integrates electric propulsion systems and light and medium-duty electric vehicles such as forklifts, and markets and sells electric chargers.

Phoenix offered just 2.1 million shares at a price of $7.50 to raise $15.75 million at a $150 million valuation. The original plan was to offer 2.5 million shares at a price of $7 to $9 a share.

The company has applied to list on the Nasdaq under the ticker symbol “PEV”. By the end of the year, Phoenix had delivered 104 electric shuttle buses and work trucks.

“Phoenix Motor is extremely unprofitable and has yet to generate significant sales,” Renaissance’s Smith said.

The company posted a net loss of $2.32 million for the quarter ended March 31, up from a loss of $1.91 million for the same period last year. according to his prospectus. Sales increased to $671,000 from $473,000 a year ago.

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Brian Lowry

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