The raw number of IPOs broke records last year but many of them underperformed.
Last year was one of the best on record for stocks and one of the worst for IPOs. Of the 1,006 companies that went public in 2021, raising collectively $315.6 billion, only 36% were trading above their listing price as the year neared its end. By comparison, the S&P 500 posted its third-best performance since the start of the century: up 26.9% (28.7% with dividends).
To be sure, 2021 was no ordinary year. Amid inflation fears and supply chain disruptions, China’s tightening on listings and encouraging signs of the pandemic’s waning (too soon thwarted by new variants), investors turned to tried-and-true stocks in technology, health care and energy.
Yet, there may be more to these new-listing flops. Despite their reputation as an asset class that tends to outperform, most IPOs fail to live up to expectations. The effect was exacerbated last year by the sheer number of companies that went public. According to data provider Dealogic, this surpassed by roughly 16% the record set in 1996 when 848 companies began trading. Such a high volume of debuts was largely a result of the growing popularity of special purpose acquisition companies, or SPACs, as a vehicle to access markets faster than the traditional process allows. With roughly 60% of offerings taking place via such mergers, the souring of investor sentiment on those hit the IPO market especially hard.
Despite their poor showing, new issues are expected to continue at a rapid pace in 2022. Among the most anticipated: social media platform Reddit, grocery delivery giant Instacart and financial technology firms Chime and Stripe. The disappointing performance of the most recent crop of IPOs could also translate into a buying opportunity for retail investors. Some of today’s most valuable companies—including Apple, Amazon, Facebook and Tesla—stumbled considerably in their early days of trading.
