Capital markets freeze as market volatility persists

It’s been a tough year for companies looking to raise capital.

The initial public offering (IPO) market, which allows a company to raise money by selling shares to public investors, has seen a sharp decline this year, following a record year in 2021.

U.S. public offerings are on track for their worst year in decades, forecasters say. Stock market volatility, driven by high inflation, rising interest rates and growing recession fears, has slowed IPO activity.

In August, only nine companies filed IPOs with the Securities and Exchange Commission (SEC), well below the 10-year average of 23, according to a report by Renaissance Capital.

“The 2022 U.S. IPO market is on track to generate the lowest-ever revenue in our company’s more than 30-year history,” the report said.

Investors showed little interest in newly listed companies amid the market downturn this year. And technology companies have been particularly affected by this trend.

The tech-heavy Nasdaq Composite, for example, is down 24% so far in 2022, worse than the 15% drop in the S&P 500 index.

Meanwhile, the Renaissance IPO Index, which tracks the largest and most liquid newly listed public companies, fell more than 40%, indicating a lack of investor interest in newly listed companies.

This month, yogurt maker Chobani pulled its IPO, which was the latest bad news for the IPO market. The company announced its withdrawal plan on September 2 letter to the SEC, after repeatedly delaying the offer.

The IPO was expected to be one of the biggest of the year, giving the yogurt producer a valuation of more than $10 billion.

Source: Renaissance Capital

In July, food retailer Fresh Market and payroll software company Justworks also withdrew their IPO filings.

According Ernest and Youngthe number of U.S. public offerings fell 75% in the first half of 2022 from a year earlier, while proceeds from offerings fell 94%.

During August’s stock market rally, some analysts thought IPO markets would rally this fall. However, not everyone is optimistic.

Tom Farley, former chairman of the NYSE and currently CEO of Far Peak, warned in June that capital markets were “completely dead” and not recovering anytime soon. Companies that think they can go public in the second half of this year are wrong, he said. CNBC.

Markets will pay a lot of attention to two potential mega-public offerings, Porsche and AIG-owned Corebridge, as they test the waters this fall.

Meanwhile, securing funding through an IPO or private market is increasingly urgent for many companies, especially early-stage startups, according to a report by Pitch booka data provider for private capital markets.

“We have a lot of companies talking to their investors, and their investors are telling them not to expect new money anytime soon,” David Peinsipp, a partner at law firm Cooley, told Pitchbook.

Debt market

The corporate debt market is also under pressure as the Federal Reserve raises interest rates at the fastest pace in decades. Higher interest rates mean less revenue to pay off many companies’ debt, which will make it harder to raise new funds.

The US central bank has raised benchmark interest rates four times this year, with the federal funds rate reaching a range of 2.25-2.50% in June. Fed policymakers are expected to opt for another 75 basis point rate hike at the central bank’s monetary policy meeting on September 20-21.

Higher borrowing costs will force companies to borrow less, which could then reduce their business activities, investments and hiring. Some are also concerned about default risks.

Business bankruptcies in the United States are already on the rise. Last month, for example, 38 companies filed for bankruptcy, up from 31 in July, according to S&P Global Market Intelligence.

Market experts predict that the number of bankruptcies will continue to increase in the coming quarters. The biggest bankruptcies this year with more than $1 billion in liabilities include Carestream Health, OSG Group Holdings, Aearo Technologies, Celsius Network and Revlon.

In addition, dozens of mortgage companies have filed for bankruptcy, reduced staff or been forced to merge.

Emel Akan

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Emel Akan writes on business and economics. Previously, she worked in the financial industry as an investment banker at JPMorgan. She earned a master’s degree in business administration from Georgetown University.