U.S. IPO Activity Drops Dramatically in the First Half of 2022

Following 2021’s record-setting pace of initial public offerings (IPOs) priced on U.S. exchanges, IPO activity dropped sharply in the first half of 2022. According to FactSet data, 1073 companies IPO’d in 2021, raising $317 billion; in the first half of 2022, the total was just 92 companies, raising just under $9 billion.

There were two main factors at play depressing IPO activity in the first six months of this year. First, after peaking in the first quarter of 2021, the number of IPOs by Special Purpose Acquisition Companies (SPACs) retreated in the final three quarters of last year; during the first six months of 2022, the numbers slowed to a trickle. Second, the U.S. stock market suffered its worst first half of a year since 1970, as surging global inflation forced central banks to institute aggressive rate hikes after a decade of easy monetary policy. As of June 30, the S&P 500 was down 20.6% year to date.

Let’s examine the other trends that characterized the U.S. IPO market in the first half of 2022 and what we can expect for the second half of the year.

IPO Activity Slows to a Five-Year Low in the First Half of 2022

There were 57 IPOs in the first quarter, down 73.1% from the fourth quarter of 2021 and an 87.6% decline from Q1 2021. Activity slowed even more in the second quarter, with just 35 IPOs for the quarter, down 38.6% compared to the first quarter and down 82.5% year over year. This was the weakest single quarter since the first quarter of 2017; in fact, the first half represented the weakest six-month period since Q4 2016-Q1 2017.

The decline in gross proceeds from IPOs was even more stark in the first half of the year, as IPO activity was dominated by smaller IPOs. First-quarter gross proceeds totaled $6.0 billion, down 90.3% from the prior quarter and down 96.0% compared to a year earlier. In the second quarter, gross proceeds fell another 50% compared to Q1 and were down 94.7% compared to Q2 2021. The second quarter’s $3.0 billion in gross proceeds was the smallest quarterly total since Q1 2016.

In the first quarter, the average IPO raised just $104.7 million; in the second quarter, the average size fell to just $85 million, the smallest quarterly average since at least 2008. There were just three IPOs in the first half of 2022 that raised more than $500 million: TPG Partners (priced January 13, raised $1.1 billion), SPAC Screaming Eagle Acquisition Corp. (priced January 6, raised $750 million), and Bausch & Lomb (priced May 5, raised $630 million).

The top 10 IPOs for the first quarter raised just $3.6 billion in total; in the second quarter, the total for the 10 largest IPOs was just $2.5 billion. Compare this to the fourth quarter of 2021 when the top 10 IPOs raised a staggering $25.8 billion thanks to Rivian Automotive’s mega-IPO (priced November 20, raised $13.7 billion). The second quarter registered the lowest top 10 total since the first quarter of 2016. Interestingly, because of the dominance of smaller IPOs in the first half, four SPACs made the top 10 list.

Ten Largest IPOs in 1H 2022

Source: FactSet

The Finance Sector Continues to Dominate IPO Volume, But the Lead Has Shrunk

Of the 92 initial public offerings in the first half of the year, 33 were in the Finance sector led by 27 SPAC IPOs. The Health Technology sector was next with 18 IPOs, followed by Technology Services with 11. The Finance sector led all sectors in terms of total money raised in the first half ($5.3 billion), followed by Health Technology with $1.8 billion. Together, these two sectors made up 79.0% of the total amount raised in the first six months of the year.

IPOs by Sector (ranked by 2Q 2022 volume)

*Excludes all direct listings

Source: FactSet

Activity by Financial Sponsors Fell Sharply in the First Half of 2022

After surging to a seven-year high in 2021, financial-sponsor-backed IPOs fell dramatically in the first half of 2022. There were eight venture-capital-backed IPOs between January and June—six in the first quarter and just two in the second. The second quarter was the weakest quarter for VC-backed IPOs since the first quarter of 2009, amid the Great Recession. The first and second quarters each saw just three private equity-backed IPOs, comparable to the weakness we saw in early 2021.

As we saw above for all IPOs, financial-sponsor-backed IPOs tended to be much smaller than average in the first half of 2022. Gross proceeds for VC-backed offerings totaled $908 million, while PE-backed IPOs raised just $318 million in the first six months of the year. Even if activity picks up in the second half of the year, IPOs backed by VC and PE funding are likely to show their weakest annual performance in 2022 since at least 2008.

Direct Listings Drop Off in 2022

Not surprisingly, weakness in the stock market reduced the number of companies opting for direct stock listings to bypass the traditional IPO route via Wall Street underwriters. We saw six companies go public via direct listings in 2021; so far in 2022, there has just been one. Cannabis provider Bright Green began trading on the Nasdaq on May 17. With a reference price of $8 per share, the stock opened at $15.99 and soared as high as $36.44 on its first day of trading. However, the stock has not fared well since that first week and is now trading at around $2.20 per share.

Factors Impacting IPO Activity in 2022

The SPAC Bubble Bursts

The surge in IPOs we witnessed in 2020 and 2021 was fueled by a boom in offerings from SPACs, or blank check companies. SPACs are companies that are created with the express purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses. According to FactSet data, there were 55 SPAC IPOs in 2019, 309 in 2020, and 589 in 2021. So far in 2022, there have been just 27.

The abrupt downshift in SPAC IPOs appears to be the result of a combination of several factors. First, the market witnessed high redemption rates by initial SPAC IPO investors following merger announcements, which led to steep post-announcement stock price declines. This removed key funding for the newly formed entities, creating an even tougher environment for SPACs looking for acquisition targets. The sheer number of companies looking for merger targets means that many SPACs will be unable to find a business combination within the specified time period, usually two years, and will be forced to return money to investors.

Second, SPACs have come under increased regulatory scrutiny by the U.S. Securities and Exchange Commission (SEC), discouraging new market entrants. Some companies are now under investigation by the SEC and others face lawsuits from shareholders. With this market segment increasingly under the microscope, IPOs have been canceled and mergers called off. All these factors have been exacerbated by the weakness in the equity market as the Federal Reserve aggressively hikes interest rates.

Pullback in Chinese IPOs on U.S. Exchanges

One of the biggest IPO stories this year was the delisting of Didi Global (name at IPO: Xiaoju Kuaizhi) from the New York Stock Exchange. The company IPO’d in June 2021, raising $4.4 billion and placing it on the top-ten list of the all-time biggest IPOs on U.S. exchanges and the second biggest by a China-based company (after Alibaba’s 2014 IPO). The delisting, announced in December 2021, came after Chinese regulators began an investigation of the company’s competitive practices and pricing. On June 13, 2022, the company ticker changed to DIDIY as it began trading over-the-counter.

Months before the Didi delisting announcement, the controversy around the company immediately following its U.S. IPO led the SEC to tighten disclosure requirements for Chinese companies looking to go public in the U.S. in August 2021. This effectively put a stop to IPOs by China-based companies on U.S. exchanges. In the first half of 2021, 47 companies based in China or Hong Kong, China, IPO’d on U.S. exchanges; in the second half of the year, there were just four. In the first six months of 2022, there have just been four. The increased scrutiny of these IPOs by both Chinese and U.S. regulators may lead to more Chinese companies delisting from U.S. markets.

IPO Pipeline

Looking ahead at future IPOs, 159 companies have released initial preliminary filings since the beginning of 2021 and are still in registration (this excludes offerings that are postponed or withdrawn). Just five of these companies are not SPACs. Given the sharp decline in SPAC activity we’ve witnessed in recent months and the current market weakness in the face of continued interest rate hikes, it will be interesting to see if the IPO market can recover in the second half of 2022.

Note: All statistics are based on FactSet data for IPOs priced during the specified period for companies going public on exchanges in the United States. Note that data for previous quarters/years has been revised based on updated information, so values cited here may not match previous publications.

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