U.S. IPO Activity Slows Amid Higher Bond Yields

September is typically one of Wall Street’s busiest months for initial public offerings, but this year, it fell extremely short of expectations. 

The fall IPO market has stumbled out of the gate, with only three sizable companies entering the public market following Labor Day as of September 22. Many companies that planned to do the same in this fall window have begun to rethink their strategy. For example, Nuclear services

company Holtec Nuclear and CVC-backed Bamboo Insurance both postponed their offerings, reflecting on difficult current market conditions. 

The problem is not that investors have stopped buying stocks. Rather, the current financial environment has made them more selective about investing in newly public companies. 

Rising bond yields appear to be the primary reason. When interest rates rise, investors are encouraged to jump on relatively safer assets like government bonds because they can now earn higher returns. This raises the bar for taking a chance on riskier investments like newly public companies, as investors now require higher returns. Additionally, when higher interest rates occur, the present value of future profit lowers. As a result, a lot of pressure is placed on companies whose valuations depend on revenue generated years from now. 

The effects are already visible in IPO pricing. Property insurer Orion180 initially sought shares priced at around $15 to $17. Instead, their September offering was priced at just $12, raising $240 million when their initial goal was $320 million. 

Companies considering an IPO are now faced with a difficult choice. They can either accept a lower valuation or wait and hope for better conditions. Holtec chose the latter, shelving an offering that had sought to raise as much as $900 million

The IPO pipeline hasn’t disappeared. Going public is absolutely still possible. However, going public at the original desired valuation is becoming increasingly harder.