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The IPO market took a tumble in 2022, but still had winners

After a frenzy of IPO activity in 2021, dealmaking dried up last year. Companies found it hard to raise cash and valuations plummeted, while some deals were pulled altogether. There were some big successes, though, especially in the biotech sector, but these were few and far between.

- There were only 71 direct listings in the US in 2022 versus 397 in 2021

- Energy and healthcare were the only sectors to boast a positive average IPO return last year

- The First Trust US Equity Opportunities ETF offers exposure to several 2022 IPO successes

According to the EY Global IPO Trends 2022 report published 15 December, there were only 1,333 IPOs globally in 2022, declining 45% from the previous year. Those deals raised a combined $179.5bn, a year-over-year decline of 61%.

Companies struggled to raise cash and sell shares due to heightened volatility caused by a cocktail of headwinds: the war in Ukraine, the resulting energy crisis, and soaring inflation and interest rates. A poor investing environment for equities in general meant many companies postponed plans to go public.

Weakened stock markets, valuations and post-IPO performance have further deterred IPO investor sentiment”, commented Paul Go, EY global IPO leader.

Lower valuations have also led to fewer large deals being made. There were only 71 direct listings in the US, down from 397 in 2021, according to Renaissance Capital. These listings raised a combined $7.7bn, but only 16 of them managed to raise more than $100m.

Energy and healthcare outperform tech and industrials

According to Renaissance Capital research, energy and healthcare were the only two themes to see positive IPO gains. The two IPOs in the energy sector averaged a 22.2% return while 20 healthcare IPOs returned an average of 6.8%.

The worst-performing themes were consumer discretionary, industrials and real estate. They all saw negative IPO returns with averages of -57.5% or more. Nineteen tech IPOs averaged a negative return of 47.1%

There were some bright spots, though. These included semiconductor solutions provider Credo [CRDO], whose share price shot up 16.5% on its debut on 26 January, and remains up 7.4% since. Autonomous driving tech company Mobileye [MBLY] spun out of Intel [INTC] on 26 October. The formers share price is up 15.8% since launching on markets.

Nonetheless, the tech IPO market doesnt look like itll recover anytime soon. 

Until we see a persistent return to intelligent capital allocation as the primary driver of investment decisions, I think the IPO market will struggle … Once investors focus on fundamentals again, I think the markets can get back to doing what they are supposed to do: support intelligent allocation of capital,” David Trainer, CEO of investment research firm New Constructs, wrote in an email to CNBC.

Biotech in focus

According to Renaissance Capital, the list of the biggest IPO returners of last year was propped up by biotechs.

The share price for Belite Bio [BLTE] has soared 138.4% since it went public on 29 April. Amylyx Pharmaceuticals [AMLX] gained 76.5% when it launched on 7 January last year, and its share price is up 71.3% since then. The Arcellx [ACLX] share price is up 63.3% since 4 February.

For all the dizzying success some biotechs have enjoyed, the theme has also seen a fair share of setbacks.

Following its September IPO, Third Harmonic [THRD] tanked approximately 75% after its inflammatory skin condition drug showed high levels of liver toxicity, leading to the study being discontinued.

Last year, the special purpose acquisition company (SPAC) bubble burst. During the pandemic, blank cheque companies were seen as a vehicle to easy money and gained popularity among young startups working on innovative medical breakthroughs.

A SPAC deal to take Intrinsic Medicine public collapsed in December. Blank cheque company Phoenix Biotech [PBAXU] said that it was extremely impressed” by what Intrinsic Medicine had achieved – its leveraging human milk biology to treat gut disorders – but said current market conditions” just werent right.

Funds in focus: First Trust US Equity Opportunities ETF

For investors interested in gaining exposure to the IPO market, IPO ETFs can offer access to some of the more high-profile public debuts of 2022.

The First Trust US Equity Opportunities ETF [FPX] follows the IPOX-100 Index. It holds TPG at a weighting of 1.50%, Mobileye at 1.12%, Corebridge at 0.83%, Credo at 0.30%, Amylyx Pharmaceuticals at 0.25% and Arcellx at 0.12% of assets under management. The fund is down 34.7% in the past 52 weeks.

The Renaissance IPO ETF [IPO] holds Corebridge at a weighting of 0.46%, Mobileye at 0.47% and TPG at 0.49%. The fund is down 55.6% in the past 52 weeks.

Disclaimer Past performance is not a reliable indicator of future results.

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