December 3, 2022
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Flood of IPOs has slowed to a trickle in 2022

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The Santa Barbara headquarters of Impact Technologies. The company had planned to go public in 2022 but is now delaying the move. (file photo)

After reaching new heights in 2021, including a $150 million capital raise that closed in July and surpassing $100 million in annual recurring revenue, Santa Barbara-based Impact Technologies was preparing to go public in 2022.

But, with rising inflation and interest rates decimating the stock market, the IPO money that was available in 2021 has dried up, and so has the interest of many companies, including Impact.

“It was our plan to be a public company this year, but considering the dynamics in the market, that has likely changed,” Impact CEO David Yovanno told the Business Times.

Two other companies based in the tri-county region were reported last year to be considering IPOs: Guitar Center in Westlake Village and Mindbody in San Luis Obispo. Neither company responded to requests for comment, and neither has taken any steps toward a public offering in 2022.

The IPO market set records in 2021, including 1,035 companies in the U.S. going public and raising a total $315.6 billion, according to data from Renaissance Capital.

That was more than the number of U.S. IPOs in 2019 and 2020 combined.

As of May 31, there have been 114 IPOs in the United States so far in 2022, down nearly 78% from the same time last year, according to Stock Analysis, a website that tracks IPOs and other data about publicly traded companies.

“Many of those IPOs (in 2021), especially those that were smaller IPOs and those that were completed later in the year, really just didn’t perform very well,” Ryan Wilkins, a shareholder at Stradling Yocca Carlson and Rauth, told the Business Times. “I think it was expected for the pendulum to swing back after incredibly high demand, an incredibly large number of IPOs … especially with increased interest rates and an inflationary environment.”

Wilkins has helped many companies navigate the IPO waters, including AppFolio in May 2015. Given the market conditions, he has advised a few of his clients to delay their 2022 IPO plans.

“The concern is one of valuation,” he said. “The markets have been hit really hard this year across the different indices and so you have much lower valuations so the companies that are able to get out and are able to have a successfully completed IPO are likely to be lower multiples and lower valuations.”

Lowering the valuation of a company dilutes the existing shareholders’ stake in the company, as newer investors get in at a lower price, which drives down the money raised as well as those shareholders’ profits — if there are any.

This means with the market being down this year — a 14% decline for the S&P 500, the NASDAQ down 23% points and the Dow Jones Industrial down 10% — existing public companies are seeing their values drop.

Only one company from the Central Coast has gone public in 2022: Westlake Village-based Energy Vault, which went public via a special purpose acquisition company in February.

Energy Vault raised approximately $235 million in gross proceeds from going public, including $195 million from a PIPE, or public investment in public equity. But on its first day of trading, shares fell 19%, from $11.50 to $9.39.

The company has more than regained that loss, closing at $15.24 on May 31. But the same can’t be said for many of the other companies that went public this year.

According to Stock Analysis, only 19 of the 114 companies that have gone public in 2022 are currently trading above their listed IPO prices.

“The landscape has changed,” Michael Pfau, a partner at Reicker, Pfau, Pyle & McRoy, LLP, told the Business Times. “Interest rates rising, and anticipation they could rise further, and inflation have caused a massive repricing of assets, especially risky assets like the stock of startup companies that are going public.”

SPACs contributed heavily to the flooded IPO market last year. More than 500 companies went public via a SPAC in 2021, and of the 114 companies that have gone public this year, more than half have been through a SPAC deal.

“There were a lot of bad and broken business models that got out in the form of a SPAC,” Pfau said. “Usually going through a SPAC or reverse merger is a sign those companies are not ready for prime time. Those were bound to fail and once you see a lot failing, that entire corner of the market becomes tainted and makes it harder for other companies.”

To see an IPO comeback before the end of the year, the Federal Reserve needs to get inflation under control, Pfau said.

Typically, the Fed raises interest rates in times of inflation, which slows the economy and can trigger a recession. Despite recent Fed increases, Pfau thinks we are still months or a year away from that point.

Impact has not completely ruled out a 2022 IPO, though Yovanno said the company will probably wait until 2023. Yovanno said investors are currently waiting to see a stabilization in interest rates before jumping in with additional cash for newly public companies.

“Interest rates don’t need to go down, but they’re looking for some sort of certainty that they’re not going to keep going up,” Yovanno said.

While the company’s plans to go public have likely been dashed for this year, Yovanno said an IPO was never meant as a reflection of how Impact is doing.

“I look at going public is as just another primary round of capital,” he said. “It’s just something you do to operate the business. In this case you’re just doing it in the public market instead of the private market. … The goal isn’t to be a public company. The goal is to build a global standard platform for partnerships.”

Yovanno said the company’s raise of $150 million last year was actually ahead of schedule, but it was “really good timing” and “the best thing we could have possibly done.”

Impact still has more than $100 million in cash, which gives the company three or four years of runway. In the past year, the company has expanded to more than 1,000 employees worldwide, more than 120 of them in the Santa Barbara headquarters.