War in Ukraine finishes off the 2021 IPO vintage

Frankfort, New York The economic upheavals caused by the Ukraine war have finally pushed the prices of the already weakening stock market newcomers of 2021 into the red. Almost all larger initial public offerings (IPOs) are under pressure after Russia’s attack on the neighboring country, and some investors have had to cope with severe price losses.

The poor performance of newcomers over the past year is now becoming a burden for the already extremely difficult IPO business in 2022. Many market participants in the underwriting market openly or privately admit that valuations in 2021 were very high. Accordingly, the prices of some newcomers have fallen dramatically.

Marco Carbonare, Global Co-Head of the Equities Practice at the Linklaters law firm, therefore sees a need for adjustment among issuers: “In a difficult market environment, it can generally be expected that investors will demand higher price discounts for IPOs.”

According to a survey by Berenberg Bank, more than 30 percent of investors expect a discount of 20 to 30 percent on the fair value of the respective share.

In particular, the online platforms Auto1 and Mister Spex proved to be bitter disappointments for investors, with price slumps of over 75 and 65 percent respectively compared to the initial listing. Cherry (computer accessories), hGears (components for e-drives) and Veganz (plant-based foods) also lost significant value.

While several stocks were still in the black before the war in Ukraine, only the radio mast operator Vantage Towers with a price gain of well over 30 percent is good business for the subscribers of the new shares after the war began. The software group Suse recently fluctuated in a narrow range around the first stock market price.

Even in the stock market year 2020, the winners have become rare. Only the armaments electronics specialist Hensoldt stands out with an increase of over 100 percent – thanks to the 100 billion financing package for the Bundeswehr.

lull in IPOs

So far in the current year there have been no major IPOs, the high price fluctuations have ensured that the otherwise popular issuance window has closed around Easter. But that doesn’t mean that preparations for placings are at a standstill. There are numerous candidates just waiting for a favorable moment after the summer.

If the markets stabilize in the coming months, companies such as Thyssen-Krupp’s hydrogen subsidiary Nucera and Springer’s job portal Stepstone could venture onto the floor in June, according to financial circles. For September/October – traditionally the most popular season for new issues alongside the Easter window – there is a long list of potential IPOs.

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Above all, Volkswagen could take its sports car subsidiary Porsche public, with a valuation of up to 80 billion euros. Also in the starting blocks are: the cloud company Ionos from United Internet, the Pro-Sieben dating portal Parship, the medical technology company Otto Bock, the Yton aerated concrete manufacturer Xella, the gas engine manufacturer Innio and the fuel card provider DKV. The online fashion company BestSecret, the battery company BMZ and the real estate company X+Bricks also have stock market plans for the fall.

It remains to be seen whether Cheplapharm will then dare to try again. The pharmaceutical company canceled its planned IPO in January. Schott’s pharmaceutical glass products division is also ready for an IPO, but is not expected to come onto the market until early 2023.

Time windows for IPOs have become significantly smaller

However, there are also companies whose stock market plans are finally being thwarted by the war in Ukraine. Investment bankers warn that BASF subsidiary Wintershall Dea will find it difficult to attract investors in the long term, mainly because of the Russian shareholder Letter One, which holds more than 27 percent of the company.

In addition, oil and gas companies perform poorly on so-called ESG criteria. ESG stands for ecological and social compatibility as well as good corporate governance.

In view of the war in Ukraine, the market for the shares of stock exchange newcomers is currently only very limited. “We expect selective IPO activity up to the summer break, the time windows in which IPOs are possible are significantly smaller than in previous years due to the increased volatility on the stock markets,” says the Goldman Sachs banker responsible for the German equity market business Philip Sweet. A majority of investors expect between 25 and 50 major IPOs across Europe this year after 157 in 2021, according to the Berenberg survey.

In this situation, investors place higher demands on the stock market candidates: “The business models should be resistant to crises and inflation. Market and price leadership will become more important here than in the past,” emphasizes Christopher Wickli, who is responsible for IPO advice at the investment bank Lazard.

Bankers and consultants see the following success factors for the upcoming IPOs:

• Reasonable valuation with room for price gains after the first day of trading.
• If the business is not yet profitable, then there must be a clear timetable for when it will be in the black.
• The issue should have a minimum volume of 500 million euros, so that long-term funds can get involved, which small companies often avoid.
• Ideally, a larger anchor investor should step in before the IPO. This gives other investors confidence.

In the USA, too, tech companies are no longer a sure-fire success

The latest figures from the USA also show how dramatic the slump in the issuing business is. In the first quarter, just 77 companies went public, raising $12.2 billion, according to data from analytics firm Dealogic. That’s 81 percent fewer companies than a year ago, which made $140 billion at the time.

The mood has turned, especially for the once popular technology IPOs. This applies to both start-ups and tech companies that are already listed. “Unprofitable companies and those with business models that have not yet proven themselves will have a hard time,” says Dan Morgan, portfolio manager at asset manager Synovus.

For a long time, technology stocks were the absolute stars in the portfolio. But in times of rising inflation and rising interest rates, the fast-growing and often unprofitable companies have a hard time. “The poor performance of tech IPOs is a warning sign and shows that there is a cap on valuations somewhere,” warns Sven Weber, who advises venture capital fund Knightsbridge Advisors.

The start-up Instacart, which delivers supermarket purchases to your home and was therefore particularly in demand during the pandemic, shows how difficult the climate is for tech companies in particular. Instacart wants to go public in 2022.

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The company downgraded its valuation by 40 percent to $24 billion at the end of March. This brought the start-up closer to the ratings of listed companies such as the delivery service DoorDash, which has lost around a quarter of its value this year.

Since the IPO at the end of 2020, DoorDash has lost a good 30 billion dollars or 45 percent in value. The situation is similar with the other big stock market stars from the past year. The trading app Robinhood has lost a good 65 percent of its value since its debut in July. The crypto exchange Coinbase is a good 50 percent weaker.

Phil Haslett works for EquityZen, a platform that facilitates the trading of employee shares in privately held companies that are about to go public. According to Haslett, shares of such start-ups are 10 to 30 percent lower than they were a quarter ago.

The technology IPOS crisis is also reflected in the business with empty shells, which experienced a veritable boom last year. These so-called Special Purpose Acquisition Companies (Spacs) are a means of bringing young growth companies in particular to the stock market more quickly via a detour. First, the Spac collects capital from the investors via an IPO, then this empty stock market shell looks for a lucrative takeover target.

At the moment, according to investment bankers, this business is virtually frozen. The outstanding Spacs are having a hard time finding lucrative targets, and the initiators are finding it more difficult to get loans to finance the takeovers.

Similar to Germany and Europe, companies in the USA are also positioning themselves to catch up on their IPOs as soon as the situation on the markets improves. The software manufacturer Justworks, the supermarket chain Fresh Markets and others have adjusted their stock exchange plans accordingly. The social network Reddit, which was at the center of a trading boom during the pandemic, also wants to be on the floor this year and has hired Goldman Sachs and Morgan Stanley to do so. Other IPO candidates include social network Discord, popular with gamers and crypto investors, which rejected a $10 billion takeover bid from Microsoft last year.

More: Schott wants to list its pharmaceutical packaging division on the stock exchange.