When’s A Good Time To IPO?

The excitement of going public is returning as corporates find moxie and roll the dice.

There are plenty of reasons for a company not to go public nowadays. Sticky inflation, interest rate hikes, low profitability and Russia’s ongoing war in Ukraine continue to spook corporates thinking about launching an initial public offering (IPO). The brief, yet potent, banking crisis was enough to delay IPOs, too.

“It’s always something,” says Jeeho Lee, partner and chair of O’Melveny’s Capital Markets practice, adding that while the market certainly desires stability, it doesn’t require “all to be calm.”

If persistent instability determined whether the IPO’s timing was right, Lee would “gladly take July off.” But she was busy this summer, advising the upsized public offering of Lilium, a German company that makes electric-powered jets that take off and land vertically.

An upsized $75 million underwritten public offering formed part of the overall capital raise, and the rest was a $42 million private placement in public equity (PIPE) deal and a $75 million investment from Singapore-based Aceville Pte. Ltd., a sub-unit of Tencent. Investment bank B. Riley Securities was the deal’s sole bookrunner and placement agent.

The IPO winter hasn’t officially ended. In the first half of 2023, global volumes fell 5%, with proceeds down 36% year-over-year. But Lilium, along with other successful IPOs like restaurant chain CAVA Group in June and energy producer Hidroelectrica in July, are positive signs that things are warming up, Lee argues.

Both Washington, D.C.-based CAVA and Romania’s Hidroelectrica were oversubscribed. CAVA, a popular Mediterranean-style takeout and dine-in franchise, closed out its first day on the New York Stock Exchange at a 99% gain from its IPO price. On its debut, shares of Hidroelectrica—touted as Europe’s biggest IPO since Porsche in September 2022—surged as much as 9.7% on the Bucharest Stock Exchange.

The retail and institutional investor appetite for profitable assets was palpable. “Of course, while still possible, it’s suboptimal to go public when the market is not excited about equity investing,” Lee says. “But I think the existence of a relatively healthy pipeline of IPOs and the fact that most of the recent IPOs are still trading well suggests that we should be expecting a thaw in the IPO market. All the IPO market players are looking for a reason to get off the sidelines.”

Lee is tight-lipped as to which particular companies she anticipates will go public in the fall and winter months. But the IPO rumor mill isn’t quiet. 

Among the most talked-about pending IPOs are Swedish fintech Klarna and Dublin-based payment processor Stripe. Artificial intelligence innovator Databricks and plant-based meat manufacturer Impossible Foods, both based in California, are also reportedly preparing offerings. The valuation of all four companies together totals almost $100 billion.

Klarna and Stripe are expected to turn a profit this year. Databricks was rumored to be floating the idea of a public offering in January. And Impossible Foods has been flirting with the idea of an IPO since at least 2021.

When the Timing Is Right

To IPO, “multiple factors” should align first, Lee says, and profitability is key. It’s typically “a transformative point in a company’s lifecycle,” she says. “The company is at an inflection point, or at the cusp of an inflection point, in its growth story.”

By having the right team in place, a company may find itself able to take advantage of the liquidity opportunity, both for employees and shareholders.

“I’d agree with that,” says Tricia Tolivar, CFO of CAVA. With a valuation of $2.45 billion, the franchise’s public debut made those in the corporate finance world wonder: Perhaps other companies of unicorn status will follow its lead and help thaw the IPO market. “With many capital options, we were in the enviable position of not needing to go public but felt this was a great opportunity for our business and customers,” Tolivar says.

Being publicly owned is also “a natural way” to raise brand awareness and invite consumers to own a stake, she argues. With its newfound capital, CAVA can “scale faster” and expand its presence across the US.

“We certainly felt that the time was right for CAVA,” Tolivar says, “but we also believe that investors are always going to respond to a category-defining concept with a significant, long-term whitespace opportunity, strong unit economics, and clear execution plans for sustained growth. The IPO was exciting, but we’re focused not on the day-to-day machinations of the market but on building a strong, defensible business poised to succeed over the long term.”

It’s evident in the year-to-date activity that the US market will continue to recover, says Paul Go, EY Global IPO Leader.

“What we are seeing is that for companies that are leaders in their own industry sectors, they are always welcomed by investors, especially when they are those ‘must hold’ stocks in any investment manager’s portfolio,” Go says.

For example, the $4.37 billion upsized IPO in May of more than 198 million shares of common stock in Kenvue, a carve-out from Johnson & Johnson, ended up as the largest US IPO since November 2021. The deal contributed to US IPOs raising $10.1 billion across 63 deals for the first half of 2023, EY reported, representing an increase of 115% and 24%, respectively, over the comparable 2022 period.

Location Matters

Asia-Pacific has been the driving force for most global IPO activity, despite a decline in proceeds, Go notes. Of the top 10 global IPOs, half were located in mainland China. Japan contributed at least two successful deals in its own right: Rakuten Bank at $676 million and SBI Sumishin Net Bank at $421 million.

APAC saw 371 total IPOs: a year-over-year decline of just 2%. Companies in the region raised just shy of $40 billion, although this was down 40% year-over-year.

“There are many active stock exchanges from Greater China—Shanghai, Shenzhen, Hong Kong and Taiwan—[plus] Indonesia, Japan, Korea and Thailand in recent years,” Go adds. For the first time in over 20 years, in fact, Indonesia surpassed Hong Kong in the global stock exchange rankings by volume.

While many large IPOs never came to fruition, Go points to trends in emerging markets signaling an IPO comeback. Middle East/North Africa recorded a year-over-year decline in IPO activity in the first half following the drop in global energy prices over the last year, but the region could still boast  two of the top 10 global IPOs, including Adnoc Gas, a $2.5 billion energy company listing on the Abu Dhabi stock exchange.

“Companies in the MENA and [Gulf Cooperation Council] regions in particular are witnessing good and improving conditions for IPOs,” says BDSwiss CEO for MENA, Daniel Takieddine. “The large number of successes has attracted many local and foreign investors to the market, creating opportunities for these companies to raise capital and gain a larger brand recognition in the process. The fact that many companies were seeing oversubscribed IPOs showed that there is a strong appetite among investors in markets that are often flush with cash.”

Throughout the MENA, there’s also a willingness to diversify away from oil, which suggests that future listings will be successful as the non-oil sector grows in importance, “It goes without saying that for an IPO to be successful, it is necessary that a company shows a strong financial profile and promising growth perspective for investors to commit their funds,” says Takieddine.

IPO optimism isn’t spread evenly across the globe, however.UK investment broker Numis warned of an “effective closure” of Britain’s IPO market for the remainder of 2023. The firm’s report came as soda ash producer WE Soda blamed “extreme investor caution in London” for its canceled $7.5 billion listing, which would have been the largest IPO in the UK this year.

“Europe is not expected to do much better given the continuing impact from the war, and the European markets are not attracting the largest companies compared to the US for higher valuation and depth of investor pool,” Go says. European deal numbers dropped by 38% year-over-year in the first half, but proceeds stayed level, thanks to a pair of Italian IPOs in the second quarter, gambling firm Lottomatica and Italian Design Brands.

Should inflation peak and rate hikes cease, the end of 2023 and early 2024 will be more favorable, Go predicts. And despite the lag in European IPO activity, the overall market is “definitely showing signs of a healthy deal flow,” O’Melveny’s Lee says. “It’s different than what we had in 2022, and for the most part of 2023,” she observes. “I don’t think the rest of 2023 is going to be like 2020 or 2021, but it’s nice to see this cadence.”