Weak IPO debut may signal challenges for future U.S. listings

Wall Street appreciates a meticulously executed IPO, characterized by a larger number of shares available and price increases in advance of the event, signaling heightened demand. At the peak, the shares of newly-listed firms spike on their debut trading day, setting the stage for more anticipated launches.

However, this year has seen three of the four largest initial public offerings in the US fall below their offered price during their first day of trading—a significant blemish on any offering, especially while stock indices hover near record highs.

“The trading in the secondary market indicates that investors are remaining skeptical about valuations,” remarked Rob Stowe, head of Americas equity capital markets at Barclays Plc. “What are the implications for the future? Upcoming companies will need to be strategic in their approach to investors and consider their valuations carefully.”

Only two of the US IPOs that raised over $300 million have experienced share increases greater than 15% from their offer price—while Venture Global Inc., the largest of the year, is down 35% from its IPO price ahead of its debut on January 24. The modest returns over several days and weeks fall far short of investor expectations for IPOs, which are conventionally sold at a discount compared to already-public counterparts due to their inherent risks.

Venture Global, which exports liquefied natural gas, initially suggested a valuation of $110 billion to prospective investors before reducing those expectations. It has since wiped out approximately $24 billion in market value since its listing last month. Thoma Bravo-backed SailPoint dropped as much as 9.7% on its first day and closed at $22, a dollar less than its IPO price, although it has seen somewhat better trading in the days following.

The eight companies in the US that carried out IPOs this year with proceeds exceeding $300 million have reported a median return of less than 5% on their first day, according to data compiled by Bloomberg. This contrasts with a median gain of approximately 12% over the last three years.

Amidst a wave of optimism surrounding artificial intelligence, equity investors have been inclined to overlook geopolitical uncertainties, driving markets back toward historical highs. This scenario compels active money managers to seek methods to outperform their benchmarks and justify their existence, contributing to a surge in interest for new offerings, partly because IPOs are generally offered at a discount relative to their intrinsic worth, according to Paul Abrahimzadeh, co-head of ECM for North America at Citigroup Inc.

This rising demand has enabled IPO issuers to opt for higher pricing and attain smaller discounts from particular value assessments, leading to some offerings trading below their associated issue prices, Abrahimzadeh explained in an interview.

‘There’s a disconnect’

After a three-year hiatus in transactions, Wall Street seemed primed for a resurgence of IPOs, expecting a more favorable policy environment to unleash offerings in sectors like cryptocurrency. Major stock indices such as the S&P 500 have been on the rise for years with minimal disruptions, and the VIX, often referred to as Wall Street’s fear gauge, largely remains stable.

“All signs should indicate ‘go, go, go,’ yet often when companies have proceeded, the outcomes have not met the expectations of many of us,” noted Clay Hale, co-head of ECM at Wells Fargo & Co. “There’s a disconnect between the indicators that suggest a robust IPO market and the evidence of low deal activity and subpar performance.”

This issue raises concerns for firms ready to move forward with significant listings. Companies like CoreWeave and Klarna Group Plc, alongside large private equity-backed entities such as Genesys Cloud Services Inc. and Medline Inc., are contemplating going public in the near future, potentially with valuations exceeding $10 billion—if investors are on board.

“Activity is somewhat being constrained by a mismatch between what a company and its backers consider to be a fair value compared to what the market is prepared to pay,” asserted Seth Rubin, head of global ECM at Stifel Financial Corp. “If there is no alignment between the market and the companies, then there shouldn’t be an IPO.”

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