The global economy has endured no end of shocks over the last two years, and the volatility looks set to continue throughout the remainder of 2022.
This is undoubtedly the case with regard to the IPO market, which has seen a significant contraction in the first half of 2022 compared to the record highs reached in 2021 (which was thanks in no small part to the historically low-interest rates on offer).
How does the IPO market in 2022 compare to 2021?
In the first half of 2022, IPO volumes globally fell by 46%, along with a 58% drop in revenues over the first half of the year (compared to the same period in 2021). Both deal numbers and proceeds continued to slow into Q2 after an already sluggish start in Q1, while in Q2 there were also a significant number of IPO postponements.
Some important and revealing numbers emerged during YTD 2022, not least that energy dominated three of the top four deals in the period, with the average deal raising USD$680 million, up from $191 million YOY.
This contrasts with technology, which had hitherto been the leading fund raiser via IPO, but the average deal in this sector fell YTD from USD$293 million down to USD$137 million.
Likewise, SPAC (special purpose acquisition company) IPOs were also down, as was cross-border activity, impacted by a range of geopolitical pressures as well as changing government policies with regard to overseas listings.
What can we expect to see in the remainder of 2022?
So what has this meant for companies and investors alike, both in terms of recent behaviors and approaches in the future?
At first glance, investors are taking a more cautious approach with regard to new economy companies. Sound fundamentals are once again being seen as important, over and above anticipated growth, which is likely a result of the way in which the stock value of many new economy enterprises dropped considerably in YTD 2022.
The Global IPO Leader at EY, Paul Go, highlighted a range of contributing factors that may be limiting IPO investor confidence, such as, "Increasing market volatility from rising geopolitical tensions, unfavorable macroeconomic factors, weakening stock market/valuation and disappointing post-IPO performance." He also noted the need for companies to include ESG principles (environmental, social and governance) among their core values, given the global tightening of market liquidity.
A similar view is held by Rachel Gerring, EY Americas IPO Leader (the sharpest decline in Q2 2022 compared to 2021 has been in the Americas), who observes that, "The types of companies that will kickstart the IPO market will likely be profitable, cash flow-oriented and with meaningful scale."
Investor reticence, in particular the fall in the number of technology IPO deals and proceeds, has also led to significant revaluations of some well-known and emerging names in the fintech sector. The co-founder of Stripe has expressed doubt as to whether the company is still worth its earlier $95 million valuation, fintech firm Klarna has revised down its $46 million valuation by 30% in a bid to raise funds, while Zoopa, a British digital bank, looks likely to postpone its proposed public launch planned for the end of 2022, as does OpenPayd, a payment software firm.
So, what the recent recession (impending or actual, and regardless of whether it is technically defined as such or not) has meant is that it's been a difficult time for emerging companies and startups. When taken in conjunction with rising inflation and interest rate hikes that make growth stocks appear less attractive, it looks as though fintechs and other startups are going to continue to find it challenging to raise funds in 2022 at the same rate as they might have in 2021.This is because looking ahead in the short term to Q3 2022, most analysts believe that the uncertainty we have seen thus far will continue.
However, although many IPOs have been postponed in 2022, it is a potential positive that these deals may eventually come to market later in the year.
What can startups do to manage their finances during a recession?
Although there remains great uncertainty in global financial markets, what is certain is that in a time of a recession startups looking to raise funding through an IPO are going to have take a different approach in 2022 than they did in 2021. Likewise, all companies need to consolidate their operations and ensure that they are as efficient as possible with regard to costs in a time of recession.
Therefore, based on the current state of the market, and predictions as to how Q3 and Q4 2022 look like shaping up, here are some tips written by the CEO of hyper-growth global payroll disruptor Papaya Global on how they can prepare for a recession.
Firstly, it is imperative to have a clear understanding of your workforce costs. This includes accurate data regarding payroll, as well as spending on contractors and consultants. You also need to factor in all associated employment costs, like tax and other deductions required, as well as any benefits paid.
It can also pay dividends at a time like this to reassess and potentially modify your approach to paid time off (PTO). For instance, introducing a policy that means employees lose PTO if they do not take it by a specified time, rather than allowing it to accrue and carry over, can deliver benefits both for the company and employees alike. You might even need to consider reducing employees' PTO entitlement by one or two days each year (provided the amount of leave is still within local limits), as this can deliver a significant benefit to your annual bottom line.
Allied to this is the need to plan in terms of access to funds. If you don't have sufficient cash to get you through the next two years, you need to start looking forward and establishing a line of credit. Even if you aren't in urgent need of funds, it pays to be prepared and get ahead of the curve, as during a time of recession markets are unpredictable, and you can't necessarily see what is coming around the corner. You may not need to access your line of credit, but having it set up will mean that you can avoid potentially damaging delays in arranging finance, should the need arise.