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US IPOs: deals plentiful, profits scarce

It seems this could be a banner year for US initial public offerings. Everyone from Greek-yoghurt giant Chobani to a fitness chain backed by actor Mark Wahlberg is looking to sell shares. Excluding blank cheque companies, 215 companies have listed on US exchanges so far this year, raising more than $85bn, according to Refinitiv. That’s the most ever for the period and keeps 2021 on track to be the biggest year for traditional IPOs.

Behind the IPO gold rush: stock markets that are at record highs; an influx of retail investors that are driven more by FOMO and lolz than fundamentals and government cash infusions into the economy.

For investors, however, the robust pipeline of new offerings heralds potential risks. An oversupply could weigh on the market and lower returns should the rally falter. Already, 40 per cent of new listings this year are currently trading below their IPO price, according to Dealogic. This includes Chinese ride-hailing app Didi Chuxing, which was hit by a regulatory crackdown back home just days after it went public. 

Another concern is the growing number of lossmaking companies that are jumping on the IPO bandwagon. Only 59 — or about a quarter — of the companies that have gone public this year made a profit in its last fiscal year. The remainder collectively lost almost $12bn. And it is not just tech start-ups. Doughnut chain Krispy Kreme managed to raise $500m despite being lossmaking for the past three years.

For some, watching people pour money into unprofitable companies evokes memories of the dotcom bubble. But as long as rates remain low and yield remains scarce, investors will keep going to the IPO trough.

But with so many companies rushing to market, investors can afford to be picky. A number of companies have ended up pricing their shares below the target range after investors balked at paying steep valuations. The IPO boom may yet become a buyer’s market.

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