The US IPO Engine Looks Ready To Speed Ahead In Second Quarter

(Bloomberg) -- The engine for US initial public offerings is back in motion.

For just how long is now the big question for a growing list of companies looking to list in the second quarter, which is already showing a lot of promise for one of Wall Street's biggest fee pools. 

After knockout debuts by semiconductor connectivity firm Astera Labs Inc. and social media platform Reddit Inc. last month, company executives and their financial partners are eager to tap investors' interest while sentiment is high. Already this quarter, Microsoft Corp.-backed data security startup Rubrik Inc. and safety testing and inspection firm UL Solutions Inc. have filed for listings that are expected to add more than $1 billion to the $9.6 billion raised via IPOs on US exchanges this year.

“Recent deals have provided a nice springboard for other companies to come to market,” said Lauren Garcia Belmonte, co-head of technology equity capital markets Americas at Morgan Stanley. “Investors have shown an eagerness to learn about new businesses, and that has allowed dealmakers to take IPOs forward in a market where other recent data points were skewed negative to neutral at best.”

That eagerness has translated into the best start to the year for the reception of first-time share sales since 2019. Buoyed by Astera and Reddit's respective jumps of more than 90% and around 40%, the 48 deals that priced in the first quarter are up about 25% on a weighted average, according to data compiled by Bloomberg.

To be sure, a slew of first-time issuers will be watching to see if Rubrik and UL Solutions can traverse the same course when they price their IPOs. In a year where windows can be impacted by geopolitical headwinds, the potential for market missteps remains.

“In addition, investor sentiment will be influenced by corporate earnings season, interest rate outlook and the election,” said Garcia Belmonte.

Companies that could seek to whet investor appetite this quarter include cold storage giant Lineage Logistics LLC, IT distributor Ingram Micro Inc., industrial aluminum maker Novelis Inc., digital marketing software firm Ibotta Inc., car-sharing business Turo Inc., financial services platform Marex Group Plc and health-care player Contineum Therapeutics Inc., Bloomberg News has reported.

‘Exit Route'

“Based on what we've seen in recent months, the IPO has to be a realistic exit route, especially for private equity firms that own high-quality assets,” Goldman Sachs Group Inc.'s head of Americas ECM, Gabe Gelman, said. “Often firms will continue to see full sales as attractive alternatives, but the conversation around the credibility of the IPO market is definitely back at the forefront of minds.”

Part of that credibility may come from IPO mechanics. Morgan Stanley's Garcia Belmonte, whose bank was lead underwriter on the Astera and Reddit offerings, said investors are focused on the overall deal size and also on the size of the float relative to the portion of stock likely to be absorbed by anchor investors. Constructiveness around valuation may also prove key to ensuring the IPO engine doesn't run out of gas too soon.

“Institutional investors are actively seeking companies with proven growth and a clear line of sight to profitability, but they remain highly focused on identifying the appropriate valuation multiples when participating in IPOs,” according to Keith Canton, Americas head of ECM at JPMorgan Chase & Co.

Dealmakers say that, while activity is expected to pick up in the second quarter, the market is unlikely to see a deluge of offerings analogous to the boom times of 2021, when IPOs set an all-time record of roughly $340 billion in the US and almost $670 billion globally. 

“Even though investor appetite and interest has been and remains there, there's a much more traditional IPO discount at play now versus what we saw at the end of 2021 and early 2022,” Gelman said.

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