Your New Year Resolution: Remember to Haggle for an IPO

(Bloomberg Opinion) -- The first quarter of 2021 was a boom time for initial public offerings, as investors lapped up whatever new stock was put in front of them with seeming disregard for the price they were being asked to pay. The result? A crop of new stock listings that subsequently struggled to convince the wider market of their value, and have performed poorly since going public. Having been burned, IPO investors should be expected to drive a harder bargain with bankers in 2022.

It's clear that buyers of new issues could have been more demanding when it came to the discount that's meant to apply to IPOs. The idea is that a cheap valuation relative to already-listed peers compensates for the riskiness of buying an unproven stock that has no trading history. Look at Europe's vintage — only four of the IPOs that raised over $500 million in the first quarter have outperformed the Stoxx Europe 600 Index.

In the U.S., there were 24 deals that raised more than $500 million and only nine have done better than the Russell 2000 index, itself a somewhat disappointing performer in 2021. The rest are down between around 3% to 80%. Just six beat the soar-away S&P 500.

True, it looks as though investors became more cautious about IPO valuations in the second quarter. Large European new issues that began trading from April to June are up around 25% on average, and the majority have beaten the Stoxx Europe 600 index.

But in the U.S., the good and bad performers among the second-quarter IPOs are more evenly balanced. Only half of the 26 $500-million-plus new issues from this period have beaten the Russell 2000 — although most of these have beaten the S&P 500 too.

The third-quarter data is more encouraging. So far, the majority of U.S. and European IPOs from July to September have traded up, at a time when markets have risen less smoothly. But it's probably too early to draw meaningful conclusions from this later vintage.

There are structural reasons for a splurge on IPOs at the beginning of the year. Come November and December, asset managers are likely to be more wary of taking the risk on an untested stock that might drag down their fund's annual returns. Come January, the appetite to take a punt will be stronger. And last year, investors were looking forward to the rollout of vaccines against Covid-19, and were relieved that Europe and the U.K. had achieved a separation without causing total chaos.

But the new-issues market clearly got too hot 12 months ago, with IPO discounts all but disappearing. Companies looking to list in 2022 will be hoping investors have short memories when it comes to pricing the next crop.

More from This Writer and Others at Bloomberg Opinion:

The Great British Corporate Dumpster Dive: Chris Hughes
The Paranoid Style in American Investing: Chris Bryant
Citigroup's Equities Blowout Signals Stress for European Peers: Paul J. Davies

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.