In addition to Arm, the other tech IPOs include grocery technology business Instacart and Klaviyo, a data and marketing automation firm. The three companies have each publicly filed registration statements that will allow them to sell shares in the public equity markets. (Another big name expected to list soon is Birkenstock, the shoe brand backed by L Catterton, according to a person familiar with the situation.)

“Arm is the headline IPO of 2023. Because of its sheer size, its performance will have the biggest impact across investors’ portfolios,” said Matt Kennedy, senior IPO strategist at Renaissance Capital, a provider of pre-IPO research that manages two IPO-focused ETFs (NYSE: IPO, IPOS).

The trio of deals represent different parts of the tech sector: semiconductors (Arm), software (Klaviyo) and Internet (Instacart). If they perform well, the deals will likely give smaller cap businesses the confidence to launch their own offerings, according to bankers. Companies that were planning to go public in 2024, or wanted to test the waters, are now considering moving up their plans, they said.

The 2023 IPO calendar looks flush

Roadshows for ARM, Klaviyo and Instacart are expected to begin sometime in September while the companies could possibly price their deals that month, bankers said.

The most high-profile of the trio is Arm, which is majority owned by SoftBank Group. The U.K. company designs the CPUs, or chips, that power more than 99% of the world’s smartphones, according to its regulatory filing. Arm is targeting a $60 billion to $70 billion valuation. The company was initially expected to raise $8 billion to $10 billion but the offering will likely come in lower now, Reuters reported. The IPO is still expected to clock in as the year’s biggest. 

“Arm will be a real benchmark IPO and if they trade well, then we might see more of a re-opening of the IPO market, in addition to the companies that have already publicly filed for an IPO,” said Justin Kotzin, head of capital markets at private equity firm General Atlantic.

The ARM IPO is coming during a very slow period for new issues. So far this year, 77 traditional IPOs have raised $10.2 billion as of Aug. 29, according to data from Dealogic. This is up from 70 offerings for the same time period in 2022 that collected $5.2 billion.

Both years are a far cry from 2021 when a tsunami of companies, or 397, went public raising $154 billion. Andrew Wetenhall, co-head of equity capital markets in the Americas at Morgan Stanley, thinks comparing the current IPO market to 2021 is unfair. “[That year] was a record period for IPOs that was only matched by the dot.com bubble of late 1990s,” Wetenhall noted.

The IPO boom of 2021 didn’t last. Rising interest rates, the war in Ukraine, inflation, the threat of a recession and a broad market downturn (the Nasdaq dropped 33% in 2022 while the S&P 500 fell 19.4%) helped put the brakes on new issues. 

One of the main reasons IPOs slowed down so much is the dismal performance from the IPO Class of 2021. Of the 397 companies that went public that year, only 56, or 14%, are currently trading above their offer prices as of Aug. 29, according to Renaissance Capital.  “In 2021, we witnessed a record year for the IPO market, including many high growth but unprofitable companies which are still trading below issue price,” GA’s Kotzin said.

‘Glimmers of hope’ for companies hoping to stage IPOs

This year, the broad market has rebounded. The S&P 500 is up nearly 17% while the Nasdaq has gained about 35%. Interest rates are stabilizing. The IPO market is “seeing opening glimmers of light,” said Matt Witheiler, consumer/technology sector lead at Wellington Management private investments. Witheiler is one of the managers that oversees Wellington’s Hadley Harbor funds, which has invested in 110 late-stage growth companies. More than half, or 54, of the companies have gone public or been sold, he said. Spotify, Uber and Airbnb are some of its investments.

This year’s crop of IPOs is also performing better…mostly.  So far in 2023, 19 IPOs have raised $100 million or more; over two-thirds, or nearly 85%, of this group are trading above their offer price, with an average return of 25%. But when all IPOs are included, the average return is -11%, Renaissance said. The Renaissance Capital ETF, which contains the largest and most liquid IPOs since mid-2020, is up 31.4% as of Aug. 29.

Inspire Medical Systems, which raised $124.2 million in May, has jumped 1,322% from its $16 IPO price, making it the best performing IPO this year and of the last five years, Renaissance said. Cava Group, the Mediterranean restaurant chain that raised $318 million in June, is up nearly 92% from its $22 IPO price and is the current leader among larger IPOs this year.

In a challenging new issues market, companies with strong fundamentals are typically priced attractively, Kennedy, of Renaissance Capital, said. “It makes sense we’re seeing mostly positive returns. I do think there is some element of pent-up demand,” Kennedy said.

“We’re seeing strong aftermarket performance for well placed, well-structured deals,” said Morgan Stanley’s Wetenhall.

Companies going public right now are well-known big businesses that are growing and profitable, Wetenhall said. He expects consumer and technology to remain core parts of the IPO market but also foresees companies in healthcare and energy transition, like cleantech, tapping the IPO market.

For the IPO market, recovery will come in stages, Wetenhall said. “Time plus success will set the tone, not a single transaction,” he said. Still, Arm’s debut is important for new issues. A poor performance by the company “will hurt the IPO market. It doesn’t mean no one else can go public. It’s just a harder glide path,” one of the bankers said.

How is Arm’s IPO expected to perform?

Because it will be big, investors aren’t expecting Arm to soar in its debut like smaller deals from Cava and ODDITY or to even rise 50%. The hope is that Arm’s shares don’t fall below its IPO price during its debut or in the weeks after. A negative first day or a weak aftermarket performance could negatively impact new issues, several bankers and PE executives said. Some pointed to Facebook’s dismal IPO more than 10 years ago.  In May 2012, the company that is now called Meta Platforms, raised $16 billion, making it the largest tech IPO at the time. Facebook’s stock hit a high of $45 during its debut but ended up closing at $38.23, up just 23 cents from its $38 IPO price. In the following months, Facebook’s stock dropped to below $18 a share, before eventually rebounding in August 2013. Facebook’s weak debut cast a pall on IPOs. “There wasn’t another IPO for three or four months,” one banker said. Meta shares on Thursday were trading at $300.39.

But how well should Arm do? During its first day, the IPO should trade up by 3% or more, one private equity executive said. A gain of between 5% to 15% “would be fine and like a win. Investors wouldn’t be jumping up and down, but they would be happy to gradually open up the IPO market,” the exec said. A rise of 20% or more would be considered a homerun, they said. “Then, everyone would be happy about the IPO, and this would accelerate the pace of new issues,” the exec said.

Arm’s stock needs to hold its price during its first day and appreciate during the weeks after, said Wellington’s Witheiler. “That’ll be a really strong signal to the market,” he said.

If Arm trades up, and Instacart and Klaviyo also perform well, this could create an environment where another 20 to 30 companies could go public this year, bankers said. However this assumes that macro events like another war, rising interest rates or the stock market plunging into negative territory do not happen.

Most don’t expect the IPO market to really return until 2024. It typically takes about six to 12 months of preparation before companies can go public.

“You can’t just flip a switch and the next week could go public,” said Wellington’s Witheiler.

“Reopening the IPO market is a slow process. Even if these IPOs go well, it likely will take months for other private companies who are not as far along in the listing process to be in a position to launch a deal,” added GA’s Kotzin.