It's been a bumpy ride for IPO and SPAC investors in 2021, with the latest stanza marking the steepest descent.
In fact, in just the last month, the Renaissance IPO ETF (IPO) has turned into negative territory for the year. More pressingly, the ETF has plummeted over 20% from its early-year peak.
The downturn has been led by holdings in the ETF such as Robinhood (HOOD) , Coinbase (COIN) , Rivian (RIVN) , and Bumble (BMBL) , each of which have seen major drawdowns as the market encountered choppiness this quarter. The decline, aided by trouble in Chinese stocks like Didi Chuxing (DIDI) , has far outpaced the comparatively buoyant holdings such as Moderna (MRNA) .
Robinhood is perhaps the most startling, slumping to a nadir more than 70% below its post-IPO zenith. Meanwhile, Buzzfeed's (BZFD) big debut earlier this month was hardly buzz worthy.
As many investors are beginning to become aware, high-flying IPOs and SPACs that took the market by storm to start the year appear to be falling out of favor at a rather fast pace just as newly minted IPOs encounter a less-than-enthusiastic reception
The Impetus for the IPO Decline
First and foremost, it is important to understand why exactly these formerly hot names have turned so cold at the close of the year.
Likely the largest culprit is a turn in Fed tone towards a more hawkish tenor, more aggressively tackling inflation.
"Inflation may complicate the FOMC's management of monetary policy in 2022," Fed Governor Christopher Waller said in late November. "The timing of any policy action is a decision for the FOMC, but for my part the rapid improvement in the labor market and the deteriorating inflation data have pushed me towards favoring a faster pace of tapering and a more rapid removal of accommodation in 2022."
For IPO names of late, many of which have been predicated on prioritizing growth over steady economics and downplaying the debt necessary to fuel these businesses, this is a major concern. As such, those names that can survive a higher interest rate environment and therefore more expensive debt are the best positioned. Clearly, these offerings are not the most prevalent among new IPO names.
In terms of SPACs, the dynamic is largely similar. However, there are, of course, added aspects for the recently very-popular strategy. For Yelena Dunaevsky, Vice President of Transactional Insurance at Woodruff Sawyer, it is largely a matter of regulatory actions and natural gravitational pull of markets on high flyers.
"It is market sentiment rooted in regulatory actions and whiplash from the initial wave of exuberance," she told Real Money. "There was a pretty significant lull in SPAC activity between April and October when SPAC IPOs and deSPACs started picking back up."
Eyeing Upcoming Offerings
Still, the Fed tightening that is no doubt weighing on investor sentiment is slated for 2022, arguably offering more impact for those names seeking to debut in the year to come than those already populating public markets.
Indeed, the current volatility is already bringing anxiety to the executives of some of 2022's most anticipated IPOs.
"The volatility in the market right now makes me nervous to IPO to be honest," Sebastian Siemiatkowski, CEO of fintech leader Klarna, told CNBC in an interview in September. "I think it would be nice to IPO when it's a little bit more sound and right now it doesn't feel really sound out there."
Meanwhile, Eddie Bauer-manufacturer Authentic Brands Group wholly forwent its own IPO, instead opting for a private market sale. If CEOs are getting jittery, certainly investors can be forgiven for doing the same.
Alternatively, SPAC investors might actually have a healthier environment according to Dunaevsky.
"We are expecting a healthy level of activity in 2022 and are all hoping the 2021 numbers will not repeat themselves," she told Real Money. "By that I mean that 2021 was too intense and too furious and for the SPAC market to mature and integrate reasonably into the wider financial market, it needs to show a healthy level of activity minus the hype and irrationality that we saw in 2021."
To this end, Dunaevsky suggested individual investor appetite for risk will determine their outlook on both IPOs and SPACs set to hit the market next year.
"For long term retail investors I would think it would be even more important than ever to make sure they are investing in a solid, experienced SPAC team that has several successful deSPACs under their belt and that they are not being swept away by empty hype," she explained. "For short-term speculators, the hype works very well, of course and the trick is to get in and out at the right time."
Of course, the latter technique is an exceptionally difficult task. As they say, if it were easy everyone would do it.
This was precisely the problem for those sucked in by the hype on Beyond Meat (BYND) , which soared to breathtaking heights in the summer after its IPO, only to fall more than 60% from those levels in the quarters since. Certainly that should offer a sort of roadmap for investors anticipating Impossible Foods, which is likely to list in 2022.
Sifting Through S-1 Filings
To be sure, the Impossible Foods IPO is not a one-to-one comparison, as the actual dynamics of the business are unclear given the firm has yet to file an S-1. The same is true for the aforementioned Klarna and other anticipated names like Amazon Fresh competitor Instacart, online chat and discussion platform Discord, and AI and analytics firm ThoughtSpot.
Luckily, there is some visibility on firms closer to debut such as grocery chain The Fresh Market and Greek yogurt maker Chobani via these very filings. As the current market environment for newly public names suggests, a path to sustainable profitability and a lighter debt load are key metrics for investors to be mindful of.
For The Fresh Market, managed by Apollo Global Management (APO) , this has been a metric diligently observed.
"Our management team and the Apollo Funds have taken significant steps in order to address challenges we have faced and to position us for long-term and sustainable growth, and we believe our results for fiscal 2020 and our results for fiscal 2021 to date demonstrate the benefit of these steps," the firm's S-1 filing states.
This is not empty rhetoric either. Via streamlining product offerings, lowering labor costs, and updating procurement strategy, the chain has clearly boosted margins and put itself in a strong, profitable position.
While growing sales by more than $300 million since 2018, The Fresh Market has also increased gross margins 1.7%. This has translated to overall net income growing to $26.9 million in 2021, from a loss of $78.6 million in 2019.
By contrast, Chobani has pinpointed its significant growth in sales while sacrificing its profitability.
The Norwich, New York-based dairy product producer saw an astounding growth rate over the past two years, with sales surging by about $1.1 billion. However, net losses also grew significantly from about $26.4 million in 2020 to just shy of $59 billion in 2020. The unaudited reports of 2021 do not show a great deal of improvement either, with the first nine months of the year leading to a net loss of about $24 million.
On this point, investors will need to weigh the stellar revenue growth with the still lagging profitability metrics and consider the consequences of this dynamic in the current environment that appears less forgiving of money-losing businesses.
In the end, as the Fed considers a paradigm shift, IPO and SPAC investors must consider the same. At the very least, a sober assessment of one's risk tolerance is very much in order.