IPO market remains frozen, but could rebound later this year

Following a lackluster year for tech IPOs in 2022, it’s unlikely that the first half of 2023 will be much different, as many private companies look to preserve cash and extend their runways in the face of a looming recession.

In total, IPO deal proceeds plummeted 94% in 2022 — from $155.8 billion to $8.6 billion — according to Ernst & Young’s IPO report published in mid-December. As of the report’s publication date, the fourth quarter was on pace to be the weakest of the year.

The collapse of the IPO market has caused the pipeline of anticipated public listings to swell. Among those are CNBC Disruptor 50 companies like Chime, Databricks, Gopuff and cybersecurity firm Arctic Wolf, which raised $401 million in October and has reportedly been working with banks on IPO preparations since early 2022, according to Reuters.

Today there are approximately 1,210 global private unicorns — companies valued at $1 billion or more — compared to less than half that in 2020 and just 950 in 2021, according to data from MKM Partners and CB Insights. MKM’s Rohit Kulkarni is among the few optimists who think the IPO market could rebound later this year, spurred in part by the volume of private companies waiting in the wings to go public when capital becomes more accessible.

“I think the second half of 2023 is going to look a little better than the first half, assuming that it’s mostly macro-driven,” Kulkarni told CNBC’s “TechCheck” on Monday. He added that we’re on the precipice of a “new era” for valuations that will be realized once the Federal Reserve stops hiking interest rates.

According to Carta, 22% of companies, both private and public, reduced their valuations in Q3, nearly tripling year-over-year. Meanwhile, 34% of companies saw valuations rise — its lowest point of the past five years. The tech-heavy Nasdaq reported its fourth consecutive negative quarter last month for the first time since 2001.

“Private company valuations are still far apart from their public market peers,” Kulkarni said, adding that there’s a disconnect between the valuations many companies achieved in early or late 2021 and where those companies think they’re valued in today’s environment.

“Companies like Klarna and Instacart have taken that hit already, so perhaps those are the ones to monitor in the first half [of 2023] if they are willing to go public and be the guinea pig out there, but I think the vast majority of private companies are still thinking they can grow into the valuations they saw back in 2021.”

Instacart reduced its valuation from $39 billion to $24 billion in May, then to $15 billion in July, and finally to $10 billion in December, according to The Information. Klarna raised financing at a $6.7 billion valuation last year, an 85% discount to its prior valuation of $46 billion.

Still, Kulkarni says “it’s anybody’s guess” as to what this year will hold for public listings. He estimates that there will be 40% fewer global private unicorns six months from now, but “that will be a slow process that holds the IPO market back in the first half,” due to economists’ anticipated moves from the Federal Reserve.