How Bear Markets Impact Initial Public Offerings? | Espresso


Why do IPOs dry up during a bear market?

June 22, 2022
Why do IPOs dry up during a bear market?

A bear market is officially in motion when the stock markets are down 20% from their peak. As things currently stand, in Jun 2022, markets world over are either already in a bear phase or are inching towards it. However, one common theme noticed across the board is the lack of IPO activity during a bear market. 

Take the example of a massive Indian beauty retailer, which was available for investors around the end of Oct 2021. It was subscribed a whopping 82 times of its initial Rs 5351 Cr IPO, generating bids worth more than Rs 2 Lakh Crs, during the absolute peak of the bull run. Now compare this to a similar new age logistics company, of a similar issue size. It remained oversubscribed by 1.63 times of its initial Rs 5235 Crs fundraise but had its retail and employee portions undersubscribed. Only difference? The IPO was up for bids around the second week of May 2022.  Fundamentals of the companies aside, that is still a huge difference in interest between the two IPOs, just about 6 months apart from each other. Turns out, macroeconomic factors can affect IPO interest substantially.

Here is how: 

1.Rising interest rates:

With interest rates rising world over, money starts to move out of equity and towards debt-based instruments, which provide relatively stable returns and cash flows. With the US Fed hinting at more rate hikes before the end of the year to curb rampant inflation, more money could be seen moving towards bonds which would indicate a smaller slice of the pie for IPOs. 

2.Risk off environment:

Bear markets indicate a move away from risk assets (equity, crypto, etc) to low-risk assets (bonds, real estate, gold, etc). The focus shifts from generating higher returns to capital preservation and stability in cash flows. Since IPOs are a subset of equity investments, they are perceived as risky (irrespective of valuations), and may not generate the interest they would otherwise deserve.

3.No listing gains:

One of the main reasons people invest in IPOs is to generate listing gains. However, with limited interest in the IPOs, there is a good chance that the companies that do list, won’t be generating any listing gains. This dissuades more people from investing in them and the cycle continues. Hence, companies prefer not to launch their IPOs during such a market.

4.Fear of further fall:

In a bear market, nobody can catch the bottom. It is a time when everyone fears the worst for their portfolios. An IPO in such a scenario could potentially fall to a value below its listing price. So why would they invest in the IPO when they could potentially buy it for cheaper later?

5.Lower valuations for companies:

Companies themselves prefer not to come out with an IPO during the bear market as they cannot get the same valuations that they would command in a bull run. So, unless the company has no other choice, IPO decisions are usually deferred to a more favorable market.

That being said, some of the great IPOs of the 1990s were also launched during a bear market. Infosys struggled to get its IPO subscribed in 1993, and had to be bailed out by its investment banker due to the limited interest and gloomy macroeconomic environment. However, 100 shares bought then would be worth more than Rs 2 Crs today. The real skill lies in spotting the Infosys in today’s scenario and holding on for the long term.

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Please refer the Risk Disclosure Document issued by SEBI and go through the Rights and Obligations and Do’s and Dont’s issued by Stock Exchanges and Depositories before trading on the Stock Exchanges. Brokerage will not exceed the Exchange prescribed limit.

R. Kalyanaraman
by R. Kalyanaraman

Chief Executive Officer

I am a sales guy at heart with utmost willingness to listen to people – customers, employees, competitors et al. Nothing gets me a bigger adrenaline rush than an interesting conversation with my customer!