Reddit and Galderma fire IPO starting gun

NEW YORK: Initial public offerings (IPOs) are back. Maybe.

Last week was a potential watershed moment for the long-dormant IPO market as a pair of technology darlings – Reddit Inc and Astera Labs Inc – and Swiss skin-care company Galderma Group AG went public with a rush of investor demand that sent their stock prices soaring.

For investors hoping for a revival of equity debuts, this was exactly what they wanted to see. But now it needs to last.

“For the market to reopen, you need this cohort to work on balance, you need sellers to think they’re getting an acceptable valuation, IPO buyers to make some money and the macro backdrop to stay firm,” said Tom Swerling, global head of equity capital markets at Barclays Plc.

“That’ll open up demand for the centre of the IPO bell curve.”

In the first few days, the group has mostly done just that.

Reddit rallied 48% last Thursday after pricing its deal at the top of a proposed range a day before Galderma debuted to fanfare in Switzerland with a US$2.6bil offering – the world’s biggest since ARM Holdings PLC last September.

The gains came after Astera fired the starting gun, soaring from its US$36 pricing to US$70 in three sessions.

Last week’s deals “illustrate the depth of the market for quality companies,” said Seth Rubin, head of equity capital markets at Stifel Financial Corp.

“But I still believe we’re a couple of quarters away from a broad reopening, and investors will continue reviewing deals on a company-by-company basis.”

Consider CVC Capital Markets-backed Douglas AG.

Bankers priced the offering in Frankfurt last Tuesday at the bottom of its advertised range, and the shares still slumped.

The company is “idiosyncratic”, said Tatjana Xenia Puhan, chief investment officer at Copernicus Wealth Management SA.

“What investors have done is expressed their concern about this with the drop in the share price after the IPO.”

Last week was the busiest for United States and European IPOs since September, with US$5.5bil raised.

That’s on top of the US$9.1bil raised through share sales for companies and their largest shareholders.

With global benchmarks soaring to record highs, even 2023 IPOs are getting a boost.

Among the companies that have raised more than US$250mil on US or European exchanges this year, the average stock has returned 27%.

As is the case for the stock market at large, the euphoria surrounding artificial intelligence (AI) is driving much of this action.

With investors leapfrogging one another for exposure to anything AI-related – Nvidia Corp has added more than US$1.1 trillion in market value this year alone – still-private companies are trying to incorporate it into their pitches.

Reddit touted the ability for customers to license data on the platform to train AI models.

Astera, which had Nvidia’s Jensen Huang in its roadshow video, is building products that enable the “mainstreaming” of AI and machine learning in the cloud, according to its website.

The enthusiasm will likely drive deals from IPO candidates that can “showcase their relation to AI”, as well as those with very strong cash flows and growth prospects, according to Kyle Stanford, lead VC analyst at PitchBook.

Microsoft Corp-backed data security startup Rubrik Inc and healthcare payments company Waystar Technologies Inc are among those that Bloomberg News has reported to be getting filings in order.

One key area of the IPO market is private equity sponsors, who rely on new issuance in part to return money to their investors, or limited partners, as they acquire new companies to keep the cycle of investments flowing.

After central banks globally hiked interest rates and the IPO market shuttered, the industry has increasingly faced pressure from investors demanding returns, despite exits being difficult. — Bloomberg