The pace of initial public offerings hit a new low in the second quarter as central banks around the world tightened monetary policies, pushing costs to unattractive levels for potential investors.
There were 321 IPOs launched globally in the second quarter, down from 338 in the prior three months and the worst quarter for IPOs since the second quarter of 2020, according to the latest data from S&P Global Market Intelligence.
The cumulative worth of the securities sold in those IPOs was $36.90 billion, up from $23.93 billion in the first quarter. The $60.83 billion offered in the first half of the year was down 38.5% from the amount offered in the first two quarters of 2022 and down 83.1% from the first two quarters of 2021, when IPO activity peaked.
The slowdown is due in large part to efforts by the US Federal Reserve and other central banks to fight persistently high inflation with higher interest rates, after keeping them near zero during much of the pandemic.
"The rising cost of capital has definitely put a damper on IPOs," said Ro Sokhi, a partner at accounting and advisory firm UHY, in an interview.
US in focus
In the US, there were 22 IPOs launched in the second quarter, flat from the first quarter, and $7.54 billion offered, up from $2.51 billion in the first quarter. IPO activity peaked in the US in the first quarter of 2021, when 357 were launched and $132.18 billion was offered.
Part of the decline is due to market debuts by US-based special purpose acquisition companies hitting a new low in the second quarter, as only four were launched, compared to its peak of 278 in the first quarter of 2021, Market Intelligence data shows.
European slowdown
European markets have had similar declines.
There were 35 IPOs launched in Europe in the second quarter, up from 24 a quarter earlier but well below the peak of 200 in the fourth quarter of 2021.
Return to peak?
IPOs are likely to get a boost as the Fed and other central banks move toward an end of rate hikes.
"The cost of financing deals is probably right at the height," said John Stoltzfus, managing director and chief investment strategist with Oppenheimer Asset Management, in an interview.
The Fed is expected to approve another 25-basis-point hike at its meeting this week in what will likely be the last rate increase of the current cycle.
While rate cuts may not even be considered until next year, stabilization could bolster IPO activity, said Sokhi with UHY.
"At least keeping the rates where they are would be helpful to investors … to think about what the return would be," Sokhi said.
The "perfect storm" of fiscal and monetary policy that motivated IPO activity in 2021 is unlikely to be repeated in the near term, Sokhi said. Still, the success of CAVA Group Inc., the Mediterranean restaurant chain that launched its IPO in June, could lead to other similar market debuts.
"Expectations earlier in the year were high that the economy was recession bound and that typically is not the best environment for IPOs," said Edward Moya, a senior market analyst with OANDA. "Companies were not confident coming into the market but that is starting to change after some strong debuts, like what we saw from Cava."